Bank of Korea raises policy rate again

The Bank of Korea’s monetary policy board voted to raise the bank rate by 25 basis points on May 26.

The decision is the BOK’s fifth 25bp hike since August and brings the bank rate to 1.75%. The monetary policy board has raised rates at five of its last seven meetings.

In its statement, the board said high energy and service-sector prices were driving inflation up above the central bank’s target. South Korea’s consumer price index inflation reached 4.8% in April, the highest rate in 13 years, and core inflation was 3.6%.

Since 2019, the central bank has maintained a 2% medium-term inflation target. Its mandate says it must consider “the risks of inflation remaining persistently above or below the target”.

The BOK monetary policy board expects above-target inflation to persist for some time. “It is forecast that consumer price inflation will remain high in the 5% range for some time, and run at the mid-4% level for the year overall,” it said. The central bank forecasts core inflation will finish above 3% for the year.

The board’s statement said the South Korean economy “has continued to recover”, and predicts it to grow “at the upper-2% level” in 2022. It also noted that the central bank had lowered GDP forecasts and raised inflation forecasts since February.

“The board sees it as warranted to conduct monetary policy with more emphasis on inflation for some time,” the statement continued.

South Korea also suffers from high levels of consumer debt, as well as an expensive real estate market and high inequality.

The May 26 meeting is the first chaired by the BOK’s new governor, Changyong Rhee. South Korea’s then-president Moon Jae-in appointed Rhee to a four-year term in late April. Rhee was previously director of the International Monetary Fund’s Asia-Pacific Department.

Moon, leader of the centre-left, departed office earlier this month. Yoon Suk-yeol, the conservative party’s candidate, narrowly won the 2022 presidential election and took office on May 10. His advisers had claimed that Moon failed to consult them over Rhee’s appointment.

The board comprises the governor, the deputy governor and five other members appointed by the president on the nomination of various officials and industry associations. The governor nominates one of these five. There is currently one vacancy, according to the BOK website.