SEOUL- South Korea’s central bank got ahead of the tightening curve last year but now faces pressure to move faster and farther as the weakening won fuels inflation and the US Federal Reserve takes a big-step approach to raising rates.
The Bank of Korea, the first major Asian central bank to shift away from crisis-era settings last August, must address a narrowing policy-rate gap with the United States. If domestic rates trend lower than US rates, capital outflows could pile more pressure on the currency.
Investment banks and economists are starting to change their assessment on how fast the BOK will raise rates, with some predicting the key rate will rise as high as 2.50 percent by the end of the year, from 1.50 percent currently.
Governor Rhee Chang-yong, perceived to be less hawkish than his predecessor, will be chairing his first policy meeting this month when factors such as the Russia-Ukraine war make it harder to predict when inflation will eventually cool.
“Inflation repeatedly topped expectations and this means the South Korean policy rate in fact fell in real terms despite recent hikes,” JPMorgan Chase Bank economist Seok Gil Park said. The bank raised its rate projection to 2.50 percent by year-end from 2.00 percent previously.
The won has fallen nearly 7 percent so far this year to around 1,273 per dollar after last year’s near 9 percent loss. It looks set to breach the psychologically-important 1,300 won barrier for the first time since the 2008/09 global financial crisis.
The won has weakened on foreign sales of domestic shares and a worsening trade balance, among other factors, which bodes ill for inflation. South Korea is heavily dependant on imports of energy, food and industrial components.
