Bank of Korea headquarters in Jung-gu, Seoul. [Photo=Yonhap]
Rising consumer prices and stronger-than-expected growth are fueling debate over whether the Bank of Korea may shift toward tighter monetary policy. While a hold in the benchmark rate is widely expected this month, markets are increasingly focused on when a hike could come.
According to the National Data Agency on the 6th, consumer prices in April rose 2.6% from a year earlier, the highest increase since July 2024, when inflation was also 2.6%.
The central bank expects upward pressure on prices to persist for now. At a price review meeting that day, Senior Deputy Gov. Yoo Sang-dae said May inflation is likely to accelerate as oil prices remain elevated and base effects from agricultural, livestock and fisheries products add to the increase.
Against that backdrop, the Monetary Policy Board is seen as likely to keep the benchmark rate unchanged at its meeting on the 28th. The Bank of Korea has held the rate at 2.50% after cutting it four times from October 2024 through May last year.
Still, a revision to the inflation path appears unavoidable. The bank has projected inflation of 2.2% this year and 2.0% next year, but those forecasts were issued in February, before the Middle East war. With oil prices rising, the inflation outlook in this month’s economic projections is likely to be revised higher.
Minutes from last month’s policy meeting show differing views inside the board. Some members said it would be desirable to maintain a wait-and-see stance for the time being. Yoo, speaking recently at a news briefing during the Asian Development Bank’s annual meeting, said it was time to consider raising rates.
Growth data are also adding to pressure for a shift. The preliminary estimate for first-quarter real gross domestic product showed 1.7% growth from the previous quarter, far above the Bank of Korea’s forecast of 0.9%, prompting assessments that the case for maintaining an accommodative stance has weakened.
Global investment banks have also raised their growth forecasts. JPMorgan (3.0%), Citi (2.9%) and BNP Paribas (2.7%) project growth up to 1.0 percentage point above the Bank of Korea’s 2.0% outlook.
External conditions remain challenging. The U.S. Federal Reserve, at last month’s Federal Open Market Committee meeting, upgraded its assessment of inflation to “high” and stressed increased uncertainty.
This month’s meeting is also drawing attention as the first under Gov. Shin Hyun-song, who is viewed as a “pragmatic hawk,” raising market interest in whether any signal of a policy shift will emerge.
Some in the market are placing more weight on the possibility of a rate hike as early as the third quarter. Cho Yong-gu, a researcher at Shinyoung Securities, said inflation could rise to around 3% from May through August due to the fallout from the Middle East war, and forecast a 25-basis-point hike in August. He added that any additional increases would likely come in the first half of next year, and that the Bank of Korea could opt for a stance of strategic patience.
According to the National Data Agency on the 6th, consumer prices in April rose 2.6% from a year earlier, the highest increase since July 2024, when inflation was also 2.6%.
The central bank expects upward pressure on prices to persist for now. At a price review meeting that day, Senior Deputy Gov. Yoo Sang-dae said May inflation is likely to accelerate as oil prices remain elevated and base effects from agricultural, livestock and fisheries products add to the increase.
Against that backdrop, the Monetary Policy Board is seen as likely to keep the benchmark rate unchanged at its meeting on the 28th. The Bank of Korea has held the rate at 2.50% after cutting it four times from October 2024 through May last year.
Still, a revision to the inflation path appears unavoidable. The bank has projected inflation of 2.2% this year and 2.0% next year, but those forecasts were issued in February, before the Middle East war. With oil prices rising, the inflation outlook in this month’s economic projections is likely to be revised higher.
Minutes from last month’s policy meeting show differing views inside the board. Some members said it would be desirable to maintain a wait-and-see stance for the time being. Yoo, speaking recently at a news briefing during the Asian Development Bank’s annual meeting, said it was time to consider raising rates.
Growth data are also adding to pressure for a shift. The preliminary estimate for first-quarter real gross domestic product showed 1.7% growth from the previous quarter, far above the Bank of Korea’s forecast of 0.9%, prompting assessments that the case for maintaining an accommodative stance has weakened.
Global investment banks have also raised their growth forecasts. JPMorgan (3.0%), Citi (2.9%) and BNP Paribas (2.7%) project growth up to 1.0 percentage point above the Bank of Korea’s 2.0% outlook.
External conditions remain challenging. The U.S. Federal Reserve, at last month’s Federal Open Market Committee meeting, upgraded its assessment of inflation to “high” and stressed increased uncertainty.
This month’s meeting is also drawing attention as the first under Gov. Shin Hyun-song, who is viewed as a “pragmatic hawk,” raising market interest in whether any signal of a policy shift will emerge.
Some in the market are placing more weight on the possibility of a rate hike as early as the third quarter. Cho Yong-gu, a researcher at Shinyoung Securities, said inflation could rise to around 3% from May through August due to the fallout from the Middle East war, and forecast a 25-basis-point hike in August. He added that any additional increases would likely come in the first half of next year, and that the Bank of Korea could opt for a stance of strategic patience.
* This article has been translated by AI.
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