BENGALURU: South Korea’s central bank will opt to go big again and hike rates another half point next week, pushing borrowing costs higher than expected to support a weaker won and mitigate its effect on inflation, according to a Reuters poll.
The shift in forecasts comes on the heels of widening spreads with an aggressive US Federal Reserve hinting that it will hold rates higher for longer.
Already down more than 15% this year, the Korean won is expected to fall another 1.6% by the end of 2022, according to a separate Reuters poll. This precipitous drop came despite the Bank of Korea (BOK) raising interest rates by 200 basis points since last August.
But the BOK was expected to stay the course and continue raising interest rates in the coming quarters.
An overwhelming 88% of economists, 23 out of 26, in the Oct. 4-6 poll predicted the BOK would raise its base rate by 50 basis points to 3.00% at its Oct. 12 meeting. The other three were expecting a lower rise of 25 basis points.
“Preventing currency transmission to CPI inflation will be the top priority for the Bank of Korea during the remaining period of the current bull cycle,” noted Kathleen Oh, an economist at Bank of America Securities.
“The central bank is now poised to change its initial course from step hikes to a 50 basis point hike, accompanying the mighty Fed hawks.”
The poll’s median forecast showed the base rate rising to 3.25% by the end of the year, then peaking at 3.50% in the first quarter of 2023. This forecast peak rate was above the 2.75 % predicted in an August survey.
Nearly half of economists, 12 out of 25, expected the base rate to hit 3.75% in the first quarter of next year, suggesting the bias was in favor of an interest rate hike. borrowing while inflation at 5.6% in September compared to the same month a year ago was far above the 2.0% target set by the BOK.
“A comforting decline in inflation will take time, and the BOK has made it clear that inflation will remain its top priority if it stays between 5 and 6 percent,” noted Krystal Tan, an economist at ANZ.
The poll also showed average inflation of 5.2% and 3.0% this year and next, higher than the 5.0% and 2.7% predicted in a July poll.
South Korea’s economy is expected to grow 2.6 percent in 2022 and 1.9 percent in 2023, compared with 2.5 percent and 2.4 percent forecast in the previous survey.
(For more articles in the Reuters Long-Term Global Economic Prospects Polls Brief:)