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Joo Sang-yong (center), Bank of Korea’s Monetary Policy Board member, chairs a rate-setting meeting on April 14, 2022, as the central bank governor nominee Rhee Chang-yong has yet to take office South Korea’s central bank on Thursday raised its policy interest rate in a surprise move as accelerating inflation is feared to bite into growth in Asia’s fourth-largest economy.The Bank of Korea increased the base interest rate by 25 basis points (bps) to 1.5% in its first-ever monetary policy review held without a governor. Views were almost evenly split among local bond market participants, according to a survey by Korea Financial Investment Association conducted earlier this month.“It is forecast that consumer price inflation will remain high in the 4% range for some time, and run substantially above the February forecast of 3.1% for the year overall,” the central bank said in a statement released after the rate hike. “Core inflation is forecast to remain around 3% for a considerable time.”The BOK is expected to raise interest rates by two more times this year to 2% by the end-2022, analysts said.Central banks around the world are fighting against inflation. The US Federal Reserve is expected to raise interest rates by 50 bps next month and start cutting its asset portfolio soon.INFLATION TO BE HIGHER THAN BOK FORECASTSouth Korea’s import prices surged 35.5% in March from a year earlier, the fastest growth since a 13-year-high of 36.3% reported in October last year, according to BOK data earlier in the day. Import costs for coal and petroleum products soared 74.5%, while prices of imported primary metal products rose 37.3%.Consumer inflation last month jumped 4.1% on-year, the largest growth since December 2011 on skyrocketing energy and commodity prices, government data showed earlier this month, as Russia’s invasion of Ukraine disrupted global supply.The central bank, however, saw downside risks to the economy also amid the war in Ukraine with growth in 2022 predicted to be below its February forecast of 3%, said Joo Sang-yong, acting chairman of the six-member policy board.The monetary authority plans to consider the impact of the crisis in Ukraine both on inflation and growth, Joo said.INFLATION FIGHTINGThe BOK’s latest rate hike came even as Rhee Chang-yong, its governor nominee, has yet to take office after the former chief Lee Ju-yeol retired last month. Rhee is expected to start his four-year term after the mandatory parliamentary hearing on April 19.The incoming administration set price stabilization as its top priority. President-elect Yoon Suk-yeol last week stressed that special measures were needed to curb inflation.Choo Kyung-ho, the nominee for the deputy prime minister and finance minister, also pledged to fight inflation.Choo said on April 10 that he would consider the impact of a planned supplementary budget on inflation, indicating the new government may mull cutting its size. Yoon sought extra spending of up to 50 trillion won ($40.9 billion) to support small companies and the self-employed hit by COVID-19.“I will deliberate on how we can achieve the objective of and draw an outcome from the extra budget while easing the concerns (about the inflation),” Choo said after Yoon announced his nomination. Choo Kyung-ho (second left), the nominee for the deputy prime minister and finance minister, speaks to reporters on April 11, 2022 Calls for reducing an extra budget mounted, given the rampant inflation and the country’s record sovereign debt.By Mi-Hyun Jomwise@hankyung.comJongwoo Cheon edited this article.
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