South Korea: Further tightening likely by the BoK – UOB

Economist at UOB Group Ho Woei Chen, CFA, notes the Bank of Korea (BoK) is seen hiking rates further in Q1 2022 on the back of persistent elevated inflation.

Key Takeaways

“Inflation is expected to remain elevated this year due to sustained high oil prices and the economic recovery coupled with supply disruption. After rising to a decade-high of 2.5% in 2021 (2020: 0.5%), we expect headline inflation to average 2.0% this year while core inflation could edge slightly higher from 1.8% in 2021. The monthly headline inflation is likely to stay above the BOK’s target through 1H22.”

“South Korea’s economic fundamentals have stayed strong but export growth is expected to cool due to the moderation of growth in the major economies and a high comparison base while a slowdown in China poses further downside risk. Overall, export growth had rebounded 25.8% in 2021 from -5.5% in 2020. The government forecasts exports to post a small gain of 2% this year.”

“We continue to project the next BOK rate hike in 1Q22, likely at the 24th Feb meeting instead of the upcoming meeting on 14th Jan in line with its gradual normalisation approach. The BOK remains wary of the coronavirus spread that would threaten the global recovery as well as an increase in credit risk among households and small businesses as the central bank raises interest rates.”