South Korea’s central bank raised its benchmark rate by a moderate quarter point on Thursday as the slowdown in economic growth is set to be more severe.
The Monetary Policy Board of the Bank of Korea unanimously decided to raise the Base Rate by 25 basis points to 3.25 percent from 3.00 percent.
Regarding the size of the rate hike, the board assessed that a quarter point increase is appropriate as economic slowdown is set to be faster in the future amid subsiding risks in the foreign exchange market and constrained funding conditions in short-term financial markets.
“The Board sees continued rate hikes as warranted for some time, as inflation is expected to remain high, substantially above the target level, although the domestic economic growth rate has slowed,” the bank said.
With growth slowing and inflation easing, there is a good chance this marks the end of the central bank’s tightening cycle, Capital Economics economist Gareth Leather said.
The central bank has hiked its policy rate by altogether 275 basis points in the current tightening cycle that began in August 2021.
The economy is projected to grow in line with the August forecast of 2.6 percent this year. However, growth outlook for 2023 was downgraded substantially to 1.7 percent from 2.1 percent, as exports and investment are likely to be more sluggish along with a moderate recovery in consumption.
At the same time, inflation forecast was lowered for both 2022 and 2023 but the downward adjustment to the price forecasts has not been large.
The bank slightly lowered its inflation forecast for the next year to 3.6 percent from 3.7 percent and that for 2022 was trimmed to 5.1 percent from 5.2 percent.
Another report from the central bank showed that producer price inflation eased to 7.3 percent in October from 7.9 percent in September. Month-on-month, producer prices gained 0.5 percent, slower than the 0.1 percent rise in the previous month.