The Bank of Korea raised interest rates on Friday for the third time since the summer, underscoring the board’s determination to swiftly curb inflation and financial risks, and its belief that the economy can weather virus outbreaks with less central bank support.
The quarter-percentage-point increase to 1.25% brings the rate back to where it was before the pandemic struck.
Bond futures fell as the monetary policy statement suggested rate hikes will continue. The BOK said in a statement that it expected inflation to stay in the 3% range “for a considerable time.” That view is in stark contrast to its stance in November and an indication of how price concerns have ballooned since then.
The rare back-to-back rate hike likely indicates that Governor Lee Ju-yeol had become increasingly uncomfortable about waiting to move again, following recent signs that the Federal Reserve will probably raise borrowing costs earlier and more aggressively.
An easing of daily Covid infections from a recent peak in December also helped create a window of opportunity that Lee was apparently keen to take before the end of his term in March and a presidential election the same month. Government plans for an extra budget indicate there will be continued fiscal support for the economy, adding to the case for a hike.
The rate decision shows that the BOK saw omicron’s economic impact as limited and was concerned the variant will likely add upward pressure on inflation, said Cho Yong-gu, a fixed income strategist at Shinyoung Securities.
“Financial imbalances are yet to be fully resolved, and the Fed bringing forward its tightening timing was also likely a factor,” Cho said.