BOK hikes policy rate to fight soaring inflation amid worries over slowing growth

SEOUL, Aug. 25 (Yonhap) -- South Korea's central bank raised its key interest rate by a quarter percentage point Thursday as it struggles to rein in inflation expected to hit the highest level in more than two decades this year. As widely expected, the monetary policy board of the Bank of Korea (BOK) voted to increase the benchmark seven-day repo rate to 2.5 percent at a rate-setting meeting earlier in the day, according to the central bank. The move represented the central bank's seventh increase in borrowing costs -- 2 percentage points combined -- since it delivered its first rate hike in 13 months in August last year to roll back its pandemic-era easing of its monetary policy stance and cope with fast-growing inflation concerns. It also came after the central bank raised the benchmark rate in the previous three meetings, a first in the central bank's history. In July, the BOK delivered its first-ever "big-step" rate hike of 50 basis points. In a separate announcement, the BOK revised its inflation outlook for 2022 from the previous 4.6 percent to 5.2 percent, which is the highest projection since it introduced the inflation target system currently in place in 1998. This year's growth outlook for Asia's fourth largest economy was also revised down from 2.7 percent to 2.6 percent. The BOK announces revised inflation and growth estimates every three months. The recent sequence of fast rate increases is intended to rein in inflation that has been under growing upward pressure from high energy prices and mounting import bills of other key materials whose supply disruptions remain snarled amid the ongoing war in Ukraine. The country's consumer prices, a major gauge of inflation, soared 6.3 percent in July from a year earlier, the fastest pace in almost 24 years. Inflation expectations -- people's expectations of price hikes over the next one year -- came to 4.3 percent this month, which marked a small dip from the previous month's all-time high of 4.7 percent but remained still high. The BOK has emphasized that its priority is to fight inflation, but it remains concerned that too fast and sharp rate increases could increase the household debt burden and also excessively cool economic growth that has been recovering from the fallout of the coronavirus pandemic. BOK Gov. Rhee Chang-yong told reporters after the rate increase decision in July that inflation will likely peak either in the late third quarter or early fourth quarter, though it is impossible to definitely say amid growing uncertainty at home and abroad. He added that the BOK will likely push for one or two more rate increases by year-end, but they will most likely be incremental 0.25 percentage-point rises. Another factor that apparently influenced Thursday's rate increase decision is the Federal Reserve's swift and sharp monetary tightening, including the two consecutive months of 0.75 point increases in June and July. As a result of such sharp rate increases, borrowing costs in the U.S. have become more expensive than those in South Korea, prompting concerns over the possibility of capital going out in pursuit of higher returns, a phenomenon that experts worry could further weaken the local currency against the dollar, make imports more expensive and put additional upward pressure on inflation. Market watchers are now being fixated on what Fed Chair Jerome Powell will say at the Fed's annual symposium in Jackson Hole, Wyoming, scheduled for Friday (U.S. time) to get a glimpse into the near-future trajectory of the U.S. monetary policy. kokobj@yna.co.kr (END)