The Bank of Korea should hike its policy rate to where it was before the epidemic on Friday to contain growing inflation and the mounting debt that consumers are taking on to buy property. Analysts predicted that the BOK would raise its base rate by 25 basis points to 1.25 % at its policy meeting on January 14. This was the situation in February 2020, soon before the coronavirus outbreak. South Korea’s central bank was the first and only Asian central bank to raise interest rates twice last year. It made changes in the most recent time by 25 basis points at its November meeting.
The BOK has not hiked rates at consecutive sessions for nearly a decade. “Despite mounting economic concerns at home and abroad, Governor Lee Ju-you reaffirmed his commitment to normalizing monetary policy to resolve financial imbalances,” said Paik Yoon-min, a fixed-income analyst at Kyobo Securities. “The prospect of long-term inflationary pressure is also a reason that supports raising interest rates.”
Pandemic Targets the Asian Economy
Persist year, inflation in Asia’s fourth-largest economy increased to its highest pace since 2011. It went significantly above the central bank’s estimates, indicating that a period of rising prices will last longer than expected. This strengthens the case for the BOK to intervene to keep inflation from escalating further when housing prices are skyrocketing. After an anticipated rate hike on Friday, the BOK should remain on hold in the first half of this year. Afterward, it should raise rates to 1.50 % in the third quarter.
“Interest rates are rarely ever increased twice in a row by the Bank of Korea. We predict the policy rate to remain steady on Friday, after the increase in November.”
According to Capital Economics’ Alex Holmes, three rate hikes should come later this year. In March, South Korea will hold its presidential election. According to some observers, the recent increase in the Omicron coronavirus strain would prompt the BOK to exercise caution in its monetary policy.