By Shaloo Shrivastava
BENGALURU (Reuters) – South Korea’s central bank is likely to hike its benchmark rate at a second consecutive meeting on Thursday to combat inflation running at more than double its target, taking rates higher by year end than previously thought, a Reuters poll showed.
Inflation in Asia’s fourth-largest economy rose to more than a 13-year high of 4.8% in April, as repercussions from the Russia-Ukraine war and a weakening won, down 7% this year, ramped up prices. Inflation has stayed above the central bank’s target of 2.0% for more than a year.
All but one of the 28 economists polled May 17-23 forecast the Bank of Korea (BoK) will raise its policy rate by 25 basis points to 1.75% at its May 26 meeting.
Among the first central banks to start raising rates since the pandemic, it has already hiked the base rate by a cumulative 100 basis points since August 2021.
The BoK is expected to follow up on a May move with two more hikes, one per quarter, taking rates up to 2.25% by year end, based on a majority view of 17 of 28 economists.
Three expected rates to end the year at 2.50%, seven said 2% and one said 1.75%.
The majority view is up 25 basis points compared to the April poll, taking rates to a level last seen in the second half of 2014.
But there is no consensus that rates will climb above that beyond the end of this year.
“It would be difficult for policymakers to extend the rate-hike cycle into 2023, as we expect the peak-out of inflation in 2H22,” said Oh Suktae, an economist at Societe Generale.
A separate poll taken last month predicted South Korean inflation to average 3.3% this year, but fall to 2.0% in 2023.
Of 20 economists who provided an end-2023 rate view in the latest survey, nine said 2.50%, four said 2.25%, while the rest said 2.0% or lower.
With the won down this year, the BoK is under some pressure to keep hiking while the world’s biggest central bank is also raising rates, and at the moment, aggressively.
A separate Reuters survey showed the U.S. Federal Reserve will take the key interest rate to 2.50-2.75% by year end compared to 2.00-2.25% predicted just a month ago. [ECILT/US]
“A deteriorating balance of payments position at a time when the U.S. Fed is normalising monetary policy will also add impetus for the BoK to act sooner rather than later,” said Krystal Tan, economist at ANZ.
Earlier this month, the BoK’s newly-appointed Governor Rhee Chang-yong, due to chair his first policy meeting on Thursday, said he could consider bigger interest rate increases in coming months.
(Reporting by Shaloo Shrivastava; Polling by Arsh and Prerana Bhat; Editing by Hari Kishan, Ross Finley and Emelia Sithole-Matarise)