By Shaloo Shrivastava
BENGALURU (Reuters) – The Bank of Korea is likely to stand pat at its meeting this week as its committee awaits the appointment of a new governor, but it will embrace a steeper rate hike path ahead to tame more than decade-high inflation, a Reuters poll showed.
While the U.S. Federal Reserve has now begun a tightening cycle and the European Central Bank is not expected to raise rates until later this year, South Korea’s central bank has been quick to address high inflation and ballooning household debt.
The BoK has raised its base rate by 75 basis points since August, taking it to 1.25%, making it the first major Asian central bank to normalize policy from pandemic-induced lows.
Russia’s invasion of Ukraine has exacerbated inflationary pressures. March inflation showed prices rose 4.1% from a year earlier, staying above the BoK’s target of 2% for the 12th straight month and increasing the chances of another rate hike.
But the latest survey of 29 economists, taken April 4-11, suggested the BoK will hold its policy rate at 1.25% on April 14 on growth concerns and its own lack of a governor.
“Above all, the meeting is set to take place without a governor, as the parliamentary hearing for nominee Chang-Yong Rhee is to be held on April 19,” said Oh Suktae, an economist at Societe Generale.
“But concerns on growth have also increased due to the war in Ukraine, the Fed’s hawkish stance, and the ongoing Omicron wave. A significant slowdown in household debt growth may also result in a wait-and-see stance.”
South Korea’s central bank senior deputy governor Lee Seung-heon said last week the April policy review meeting will be tricky, citing the twin challenges of dealing with higher inflationary risks and downward pressure on growth.
Yet almost 38%, or 11 of 29 economists, expected a 25 basis point hike at the upcoming meeting.
“Despite increasing growth uncertainties, we think the economic risks from rising inflation and financial imbalances will sway the BOK to continue with its rate hike cycle,” said Lloyd Chan, senior economist at Oxford Economics, who expects a hike.
The poll medians also showed the BoK following a steeper rate hiking path to control unruly inflation. Interest rates are now expected at 2.0% by year-end, a level which a February poll only forecast them to reach by the end of 2023.
Inflation forecasts were significantly upgraded in the current poll to 3.8%, 3.5% and 2.9% for the second, third and fourth quarters of the year, from 2.5%, 2.1% and 1.5% estimated in a January survey.
Inflation was predicted to average 3.3% and 2.0% for 2022 and 2023, a sharp rise from 2.0% and 1.6% in the last poll.
“Inflation is likely to stay elevated at least in the near term, after the rally in global energy prices,” noted Sanjay Mathur, chief economist, Southeast Asia & India at ANZ.
“While producers have started to pass through the higher costs of inputs to consumers, the still large gap between PPI and CPI point to persistent price pressures in the pipeline.”
The South Korean economy was forecast to expand 2.8% in 2022, down from 2.9% estimated in the January poll. However, the growth forecast for next year increased to 2.6% from 2.5%.
(Reporting by Shaloo Shrivastava; Polling by Devayani Sathyan and Arsh Mogre; Editing by Hugh Lawson)
