FILE PHOTO: The logo of the Bank of Korea is seen in Seoul, South Korea, November 30, 2017. REUTERS/Kim Hong-Ji
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By Devayani Sathyan and Anant Chandak
BENGALURU (Reuters) – South Korea’s central bank will scale back its tightening pace on Thursday and hike rates by a modest 25 basis points amid signs of slowing domestic growth, despite high inflation and an aggressive U.S. Federal Reserve, a Reuters poll found.
South Korea’s economic growth was fast losing momentum at latest measure as higher living costs erode household income and crimp demand, pressuring the Bank of Korea (BoK) to strike a balance between inflation and growth.
Still, with inflation well above the central bank’s 2% target at 5.7% in October, along with aggressive tightening from the Fed, the Bank of Korea still has a bit more to do before pausing.
All but one of 30 economists in the Nov. 15-21 poll forecast the BoK would raise its policy rate by 25 basis points to 3.25% on Thursday. One expected a 50 basis point hike.
If the majority view prevails, the BoK will take rates to the highest level since 2012.
“The combination of still-elevated inflation, and a hawkish U.S. Federal Reserve means that the central bank’s rate-hike cycle has further room to run,” noted Krystal Tan, economist at ANZ.
“Amid climbing concerns about growth and the credit market, the case for hiking at a more gradual pace has strengthened further.”
Nearly 60% of respondents, 17 of 30, forecast another hike by 25 basis points by end-March, taking rates to 3.50%. Eleven forecast rates would climb to 3.75% by then. The remaining two expected no change from 3.25%.
Median forecasts showed the base rate to stay at 3.50% until end-2023. If realised, the BoK would be one of the first Asian central banks to end its policy tightening cycle.
“We think that the BoK will note slowing growth and inflation and rising financial stability concerns and that the BoK rhetoric will likely show a more nuanced tone,” noted Derrick Kam, Asia economist at Morgan Stanley (NYSE:MS).
“The risk to our call is skewed to a more extended hiking cycle. This would be the case if global commodity prices rise due to geopolitical and/or supply concerns, or if market expectations of Fed tightening takes another hawkish tilt and leads to another bout of weakness in KRW.”