Bank of Korea Seen Holding Rates Throughout 2021; Raising Rates at Least Once in 2022

Korea
FILE PHOTO: The logo of the Bank of Korea is seen in Seoul, South Korea, November 30, 2017. REUTERS/Kim Hong-Ji

SEOUL ⸺ South Korea’s central bank is seen keeping its interest rates at record lows on Thursday and for the rest of 2021, as COVID-19 uncertainties and worries about financial imbalances offset signs of a broader economic recovery.

All 26 analysts surveyed by Reuters saw the Bank of Korea (BOK) holding its base rate at the current all-time low of 0.50%.

“Considering high uncertainties around domestic coronavirus cases and vaccine distribution, we think BOK is likely to keep its cautious tone,” Citi Bank said in a note.

“BOK is likely to continue to highlight domestic financial imbalance risks from the housing market.”

Such concerns dampened the optimism over the recent encouraging exports and inflation data that showed the economic recovery is speeding up.

South Korea’s exports expanded at the sharpest pace in more than a decade in April, while consumer inflation accelerated to a near four-year high.

Meanwhile, most analysts do not see the central bank raising rates until the first half of 2022 at earliest.

Among 23 analysts who provided long-term forecasts, 21 analysts saw BOK raising rates at least once during 2022.

Ten saw a rate hike in the first half of next year, while the other 11 saw it happening in the second half.

“We think the BOK’s priority will continue to be growth, this year, with a broader recovery going into 2022 – helped by widespread vaccine coverage – paving the way for the central bank to shift its focus onto financial stability,” said ANZ economist Krystal Tan.

“Our base case is for the BOK to raise its policy rate gradually, starting with a 25bp hike in the second quarter of 2022.”

Investor focus is on the bank’s revised economic projection, due to be released shortly after the rate decision.

Tuesday’s poll also showed that 10 economists saw the BOK raising growth and inflation forecasts to a median 3.7% and 1.7%, respectively.

The bank’s February forecasts for growth and inflation were for 3.0% and 1.3% each.

Reporting by Joori Roh and Jihoon Lee; Editing by Catherine Evans; Reuters

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