By Cynthia Kim
SEOUL (Reuters) -The Bank of Korea raised its policy rate for the first time in almost three years on Thursday, becoming the first major Asian central bank to hike interest rates since the pandemic began to curb surging household debt.
The BOK’s monetary policy board raised the benchmark interest rate by 25 basis points to 0.75%, as expected by 16 of 30 analysts surveyed by Reuters.
The benchmark KOSPI fell sharply after the rate decision, while the South Korean won strengthened. September futures on three-year treasury bonds rose after the rate hike but reversed gains soon after.
Policymakers had been signaling higher rates since May but expectations for a hike were pared recently due to the latest COVID-19 outbreak, which forced Asia’s fourth-largest economy into semi-lockdown in July.
Central banks around the world are laying the groundwork for a transition away from crisis-era stimulus as what began as emergency support for collapsing growth now overheats many economies.
Most central banks that have raised rates this year are among emerging economies concerned about capital flight and imported inflation. In Asia, Sri Lanka raised rates last week, making it the first in the region to do so.
Analysts say South Korea needs to be ahead of the curve as surging household debt and home prices threaten financial stability.
“BOK’s concerns about financial imbalances may outweigh the downside risk to economic growth from the Delta variant,” said Kim Jin-wook, an analyst at Citibank said in a report ahead of the decision.
“We now bring forward the timing of our second hike call to 1.00%, to November 2021 from January 2022.”
On Thursday, the BOK maintained its economic outlook at 4% for this year but upgraded its consumer inflation forecast to 2.1% from 1.8% previously, signaling conditions are building for policy tightening.
Analysts expect the BOK to raise interest rates next year, with most seeing the base rate at 1.25% by end-2022.
The policy decision is the first rate review the BOK has had as a six-member body after board member Koh Seung-beom left the board to head the Financial Services Commission regulatory body.
There are two more interest rate review meetings scheduled this year.
Governor Lee Ju-yeol’s news conference begins at 0220 GMT.
Source: Economy - investing.com
