Bank Of Korea Lifts Key Rate By Record 50 Bps

The Bank of Korea raised its key interest rate by a record half percentage point on Wednesday as policymakers prioritized curbing the spread of inflation expectations amid high downside risks to the economy.

The Monetary Policy Board of the Bank of Korea decided to raise the Base Rate by 50 basis points to 2.25 percent from 1.75 percent.

This was the first time that the BoK has increased the rate by 50 basis points in its history. The bank has raised the interest rate by 175 basis points in the current tightening cycle that began in August 2021.

"Considering inflation and economic conditions, though economic downside risk is indeed high, uncertainties remain elevated, and thus the Board sees it as important at this time to curb the spread of inflation expectations through a 50-basis-point rate hike to prevent acceleration of inflation," the bank said in a statement. In June, consumer price inflation rose to 6.0 percent, the highest since November 1998.

The central bank forecast inflation to remain high at above 6 percent for some time and run substantially above the May forecast of 4.5 percent for the year overall.

GDP growth is projected to be somewhat below the May forecast of 2.7 percent this year, dampened by the slowdown in exports amid weak economic growth among major countries.

The board sees continued rate hikes as warranted, as inflation is expected to run above the target level for a considerable time. The bank said the size and pace of further increase of the base rate will depend on growth, inflation, financial imbalances and monetary policies of major countries.

With economic growth set to slow and inflation concerns likely to ease later in the year, the tightening cycle is likely to come to an end sooner than the financial markets expect and rate cuts could come onto the agenda next year, Gareth Leather, an economist at Capital Economics, said.