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Korea Poised to Raise Rates, Cut Growth View: Decision Guide

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(Bloomberg) — The Bank of Korea is set to raise interest rates Thursday even as it lowers forecast economic growth, reflecting Governor Rhee Chang-yong’s resolve to burnish his inflation-fighting credentials at his first policy meeting.

All 18 surveyed analysts see the BOK hiking its seven-day repurchase rate by a quarter percentage point to 1.75%. The central bank’s updated economic outlook is also expected to show a sharp upward revision to inflation, after it earlier said consumer prices would hold at around double the 2% target for some time.

Korean policy makers are under pressure to step up tightening to combat inflation, which shows little sign of abating despite four rate hikes since late last summer. Russia’s war on Ukraine and supply chain disruptions from China’s virus lockdowns are further fueling prices, while outsized rate hikes by the Federal Reserve have the BOK on alert for capital shifting offshore.

“The risks to growth are rising, but I think the BOK is unlikely to look through the upward pressures on prices,” said Lloyd Chan at Oxford Economics. “Capital outflows pressures due to U.S. Fed monetary tightening is another pivotal factor in the BOK’s calculus.”

Rhee is walking a fine line as he seeks to rein in prices without derailing the economy’s recovery from the pandemic. Since taking office last month, he has said inflation remains more of a concern than headwinds to growth.

Rising import prices have been among factors pushing Korea’s trade balance into deficit this year. These have been exacerbated by the currency, which has been among the weakest performers in Asia over the past 12 months.

Last week, the governor said he couldn’t completely rule out the need for an outsized hike as he met with Finance Minister Choo Kyung-ho. The duo agreed to ramp up cooperation to counter inflation.

Rhee, a former Asia-Pacific director at the International Monetary Fund, began his term just as President Yoon Suk Yeol took office and highlighted inflation as the most pressing concern Korea faces.

Yoon unveiled the nation’s largest-ever extra budget upon taking office, hoping to provide a fillip to an economy that he pledged to help expand rapidly.

“A policy mix of expansionary fiscal policy and tightening monetary policy will likely continue in the rest of the current year,” according to Citigroup Inc (NYSE:C). economists Kim Jin-Wook and Yoon Jeeho, who forecast back-to-back hikes in May and July.

South Korea’s economy slowed in the first three months of the year as cases of the omicron variant surged. But signs are now emerging that consumption is picking up quickly. The jobless rate remains at a record low and restrictions on public activity have now largely been lifted.

Both President Yoon and Governor Rhee have signaled that they may resume efforts to boost economic growth once the immediate challenge of inflation is contained.

In his inauguration speech, Yoon pledged to fuel an economic expansion that he said would create opportunities and bridge social and economic disparities. Rhee has described himself as a “dove” in the long run, seeking ways to revitalize economic growth amid an aging population.

©2022 Bloomberg L.P.

Korea Poised to Raise Rates, Cut Growth View: Decision Guide

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