BOK joins jumbo hikers as inflation fight heats up

Bloomberg

The Bank of Korea (BOK) doubled the margin of its latest rate increase and promised more hikes to come, as it stepped up its battle against inflation now running at a 23-year high.
The central bank joined a global wave of larger rate increases by pushing up its seven-day repurchase rate by a half-percentage point to 2.25% as widely expected, following five previous hikes half that size. The Reserve Bank of New Zealand also raised its official cash rate by the same margin about an hour after the BOK. The BOK’s move is biggest since rates became South Korea’s primary monetary tool in the late 1990s.
The decision to go for a bigger increase now indicates heightened concern over the need to take firmer action to quickly rein in price growth that is continuing to outstrip expectations even as fears build over the outlook for the economy.
Still, BOK Governor Rhee Chang-yong indicated that larger hikes were not becoming a new norm for the bank.
“We raised the rate by 50 basis points this time because there’s greater damage if the upward inflationary pressure grows further,” Rhee told reporters. “It’s desirable to go gradually with 25 basis point hikes and monitor the situation if inflation remains at the current trajectory.”
Inflation hit 6% in June, its strongest reading since late 1998. The BOK said in a statement that it expected price growth to remain above that level for some time. Price expectations among consumers have also climbed to highest level in a decade.
Rhee said the market view that rates would reach 2.75% to 3% by the year-end were reasonable, a comment that suggests the BOK could hike by a quarter-percentage point at each of its three remaining meetings this year.
Economists flagged the fluid state of price dynamics that have repeatedly caught out policy makers around the world and also the implications for Korea’s currency if the Federal Reserve keeps hiking US rates at a faster pace.
“Realistically there’s still a chance things may get worse with inflation,” said Roh Hyun-woo, a strategist at Hanwha Asset Management. “It would be naive to think the BOK would stick to gradual 25 basis point steps if the Fed further accelerates its tightening.”
Rhee’s view also contrasts with the stance of New Zealand’s central bank. The RBNZ said it would keep hiking “at pace.”
Stock market investors largely took the rate hike in stride, with foreign funds switching their positions to buying. Korea’s benchmark Kospi extended its gains after the decision to be up around 0.8% for the day.
The won strengthened against the dollar after the decision, and continued to edge up during Rhee’s briefing, to be up by 0.7% to 1,303.35 per dollar.
The won is under pressure as the Fed accelerates its policy tightening. The currency is the worst performer in Asia after the yen this year, making its imports more expensive and worsening the inflationary pressure at home.