South Korea: BoK raised rates by 50 bps – UOB

Economist at UOB Group Ho Woei Chen, CFA, comments on the latest interest rate decision by the Bank of Korea (BoK).

Key Takeaways

“Bank of Korea (BoK) ratcheted up its benchmark base rate by an outsized 50bps to 3.00% in Oct. This was the second time that the central bank had hiked by a 50bps pace following a similar move in Jul. The strengthened policy move was in response to the high inflation as well as sharp depreciation in the won which was seen adding more inflationary pressure through higher imported prices.”

“Despite opting for a larger 50bps hike, BoK’s tone was evidently more downbeat as Governor Rhee Chang-yong flagged weaker growth outlook for the global and South Korean economies.”

“BoK signaled the need for further interest rate hikes with several BoK members now seeing the ‘terminal rate’ at ‘around 3.50%’.”

“Taking into account of the BoK’s guidance, we revise our call for the ‘terminal rate’ to 3.50% from previous 3.00%. The last meeting for the year is scheduled on 24 Nov. It is far from clear whether the BoK will hike by 25bps or 50bps in Nov but we think the risk is towards a larger rate hike quantum. The BoK made it clear that US Fed rate trajectory does hold some sway over the BoK’s rate decision due to the impact on the currency market. We see another 125bps of hikes in the remaining two FOMC meetings in 2022 (i.e. 75bps in Nov and then 50bps in Dec) and thus the risk is towards BoK frontloading the 50bps hike in Nov.”