South Korea raises interest rates amid household debt, inflation concerns | Business and Economy

Bank of Korea raises borrowing costs by 25 basis points to 1 percent.

South Korea’s central bank on Thursday raised interest rates and revised its inflation outlook, as widely expected, as concerns about rising household debt and prices pointed to further policy tightening next year.

The Bank of Korea’s monetary policy council raised borrowing costs by 25 basis points to 1 percent — a move 29 out of 30 analysts expected in a Reuters poll. An analyst saw the bank raise interest rates by 50 basis points to 1.25 percent.

It also raised its inflation outlook for next year from 1.5 percent earlier to 2 percent, suggesting further rate hikes are needed amid concerns about faster and longer-lasting price pressures.

Three-year government bond futures rose as much as 0.14 points after the bank released its forecast revision, while the benchmark KOSPI and the won fell.

South Korea has been at the forefront of withdrawing global stimulus as central banks begin to phase out pandemic-era stimulus to contain mounting inflation and growing financial imbalances.

After raising interest rates for the first time in nearly three years in August, consumer inflation in Asia’s fourth-largest economy accelerated to a nearly ten-year high in October.

The economy grew 4 percent in the third quarter, thanks to robust potato chips and petrochemical exports and flattered by comparisons to last year’s pandemic slump.

The bank expects the economy to grow by 4 percent this year and 3 percent in 2022, as forecast in August.

Rising price pressures and solid growth have prompted most analysts surveyed by Reuters to put forward their forecasts. Analysts now see interest rates rising to 1.25 percent in the first quarter and 1.5 percent by the end of 2022.

‘Financial imbalances’

“An interest rate hike had to be implemented in November because growth is strong and price pressure is mounting. Another hike is expected early next year to address financial imbalances,” said Yoon Yeo-sam, an analyst at Meritz Securities.

A complication is a recent spike in daily COVID-19 cases, which reached over 4,000 for the first time on Wednesday, clouding the outlook for the coming months.

In August, the BOK became the first major Asian central bank to begin raising borrowing costs since the start of the COVID-19 pandemic.

New Zealand raised interest rates for the second time in two months on Wednesday and the US Federal Reserve is expected to switch to tightening to contain price pressures.

All eyes are now on Governor Lee Ju-yeol’s press conference at 02:20 GMT, where investors will look for guidance on the timing of the next policy tightening.

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