SEOUL: South Korea's central bank kept interest rates steady on Thursday (Feb 24) but significantly raised it inflation forecasts and signalled the bank may need a quicker pace of tightening should price pressures build further due to the Ukraine crisis.
Wrapping up his last rate review before his term ends on Mar 31, Governor Lee Ju-yeol said he sees inflationary pressure strengthening further amid rising import costs and ongoing supply chain hiccups, which may need to be addressed with policy action.
The Bank of Korea left the benchmark interest rates unchanged at 1.25 per cent, as was expected in a Reuters poll, and upgraded its inflation forecast for this year to 3.1 per cent from 2 per cent.
"In principle higher inflation means some expansion in the extent of monetary policy accommodation, meaning there's a stronger need to respond with policy actions to stabilise prices," Lee said in a news conference.
Asked to comment on market expectations of a couple more interest hikes this year to about 1.75 per cent or 2 per cent, Lee said such expectation were "reasonable."
The BOK is taking a breather after back-to-back hikes as surging coronavirus cases and escalating tensions in Ukraine cloud the economic outlook.
With Lee's term ending on Mar 31, his successor will likely need to take interest rates higher to stem inflation in the recovering economy, in line with other major central banks that are rushing to normalise rates.
Policymakers will also be looking at geopolitical risks from the Ukraine crisis and as local COVID-19 cases hit fresh records, presenting headwinds for an economic recovery.
"Considering Lee's press conference and the sharply upgraded inflation forecast, we think there will be more room for more than two hikes for the rest of the year," said Paik Yoon-min, fixed-income analyst at Kyobo Securities.
"Should the Ukraine crisis persist for a while, commodities prices will rise further and negatively impact inflation and therefore will likely impact the BOK to raise rates."
Analysts expect the BOK to resume raising interest rates from the second quarter this year to take the base rate to 1.75 per cent by end-2022.
That would put South Korea well ahead of its major Asian peers and the US Federal Reserve, which are only beginning to turn more hawkish as they navigate tentative economic recoveries and persistent virus outbreaks.
In a monetary policy statement also released on Thursday, the bank said the pace of household debt growth is easing while the increase in property prices has moderated in all parts of the country.
Separate BOK data showed bank loans to households decreased for the first time in seven months in December while the country's residential property transactions also plunged.
It is unclear whether President Moon Jae-in will name a new governor before the Mar 9 presidential election or leave that decision to the next leader of the country.
Lee declined to comment on his replacement but said the remaining six board members at the bank will ensure policy continuity even if the appointment is delayed.