(2nd LD) BOK delivers yet another quarter-point rate hike to fight inflation

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SEOUL, Jan. 13 (Yonhap) -- South Korea's central bank delivered a quarter percentage-point interest rate hike Friday as it focuses on tackling persistently high inflation despite mounting worries over an economic slowdown.

The Bank of Korea (BOK) convened this year's first rate-setting monetary policy board meeting early in the day and lifted the benchmark seven-day repo rate from 3.25 percent to 3.5 percent.

This marked the seventh straight rate increase since April last year and came after a 0.25 percentage point hike delivered at the last meeting of 2022 in November.

It also represented the 10th increase of a combined 3 percentage points since August 2021, when the BOK began "normalizing" the ultralow rate, put in place to bolster the pandemic-hit economy, and fighting fast-rising inflation pressure.

"The board judges that the additional 25 basis points hike is warranted to ensure price stability, as inflation still remains high and is projected to be above the target level for a considerable time, although the domestic economic growth rate is expected to be below the November forecast," the BOK said in a statement explaining the decision.

"The board will continue to conduct monetary policy in order to stabilize consumer price inflation at the target level over the medium-term horizon as it monitors economic growth, while paying attention to financial stability," it added.

Friday's rate hike came as inflation remains high despite a recent letup caused by a fall in crude oil prices.

In December, consumer prices, a major gauge of inflation, rose 5 percent on-year, sharply slowing from a 6.3 percent spike in July, the fastest rise since November 1998. They still remain higher than the BOK's medium target range of 2 percent.

The BOK recently predicted inflation pressure will likely moderate "steadily" this year but prices could grow at around 5 percent "for the time being."

BOK Gov. Rhee Chang-yong reiterated concerns over inflation in his New Year's Day message, in which he said the priority of the central bank's monetary policy will stick to price stability going forward.

Experts are cautiously predicting the BOK will end more than a year of rate hikes either later this year or early next year, as it will not be able to turn a blind eye to growing recession woes.

South Korea's economy is facing growing risks of losing steam with exports, a major driver of growth, on the decline for months amid worries over a global recession. Consumption and corporate investment are also under strain from the tumbling real estate market and high borrowing costs due to the central bank's monetary tightening.

In November, the BOK revised down its growth projection for 2023 to 1.7 percent from 2.1 percent predicted three months earlier.

The central bank said in a separate press release on Friday that economic growth is expected to fall below the latest projection, citing a global recession and the impact of steep rate hikes on the overall economy.

In an apparent recognition of toughening conditions for the economy, Rhee earlier said he will closely cooperate with the government and other relevant agencies to engineer an economic "soft landing."

The BOK has hinted that the terminal interest rate of the ongoing tightening campaign will likely rise to as high as 3.5 percent.

Market watchers, however, say it could be higher than that in consideration of the U.S. Federal Reserve's hawkish stance that could widen the gap in rates between the two countries, a phenomenon that could prompt capital outflows to the U.S. for higher returns and put upward pressure on inflation by making imports costlier.

The BOK said that it "will judge whether the base rate needs to rise further while thoroughly assessing the economic downside risks and financial stability risks, the effects of the base rate raises, the pace of inflation slowdown, and monetary policy changes in major countries."

kokobj@yna.co.kr
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