Inflation Alert! Bank of Korea Pivots Back to Outsized Hike (up half-percentage point to a 10-year high of 3%) as Won Struggles and warned of slower growth to come.
Inflation Alert! Bank of Korea Pivots Back to Outsized Hike (up half-percentage point to a 10-year high of 3%) as Won Struggles and warned of slower growth to come as it sought to shore up a currency that has been driven to crisis-era lows by the Federal Reserve’s aggressive policy tightening.
Wut mean?
The BOK is the latest central bank to respond to the Fed’s doubling down on large rate hikes to try and tame inflation.
The BOK had already increased its rate by a half-point in July, before going small with a quarter-point move in August as concerns over the impact of larger rate hikes on the wider economy.
Returning to a faster pace of tightening underscores the urgency to counter capital outflows that have sent the won to its lowest levels in 13 years since the Fed made clear it will raise rates higher and for longer.
US rates were a full percentage point below the policy rate in Korea back in early March, but are now higher even after the latest move.
Interesting excerpts:
The depreciation of the won is exacerbating inflation in Korea, which relies heavily on imports of energy and other essential items. The currency was largely unchanged from its level immediately before the widely expected decision. The nation’s three-year bond yield fell one basis point to 4.33%.
Despite the slide in the won, CPI eased slightly in September, even though it remained in the 5%-6% range that BOK Governor Rhee Chang-yong says warrants further policy tightening. Prices excluding oil and agricultural products also accelerated, adding to concerns about prolonged inflation.
The worry for policymakers is that rising consumer prices will spur workers to demand higher pay, potentially unleashing a wage-price spiral. At the same time, continued resilience in consumption and low unemployment are among factors giving the BOK confidence that the economy can withstand more rate hikes.
Still, the BOK has been concerned that higher rates may increase the strains on households that have built up a record amount of debt and tip the economy into recession.
