Asia Economy

South Korea's central bank joins peers in historic half-point rate hike

Key Points
  • South Korea's central bank on Wednesday delivered a historic half-point interest rate hike to wrest control of inflation running at the fastest pace in 24 years.
  • The Bank of Korea (BOK) raised its benchmark policy rate KROCRT=ECI by 50 basis points to 2.25%, the biggest increase since the bank adopted the current policy system in 1999, as pressure mounts for policymakers to act faster.
  • Twenty-seven of 32 analysts expected the bank to go for an unprecedented half-point hike in a Reuters poll, while the remaining five expected a quarter-point hike.
Rhee Chang-yong, governor of the Bank of Korea, in a monetary policy meeting in Seoul, South Korea on Wednesday, July 13, 2022. South Korea's central bank on Wednesday delivered a historic half-point interest rate hike to wrest control of inflation running at the fastest pace in 24 years.
SeongJoon Cho | Bloomberg | Getty Images

South Korea's central bank on Wednesday delivered a historic half-point interest rate hike to wrest control of inflation running at the fastest pace in 24 years.

The Bank of Korea (BOK) raised its benchmark policy rate by 50 basis points to 2.25%, the biggest increase since the bank adopted the current policy system in 1999, as pressure mounts for policymakers to act faster.

Twenty-seven of 32 analysts expected the bank to go for an unprecedented half-point hike in a Reuters poll, while the remaining five expected a quarter-point hike.

The decision could help curb further weakening of the won after the currency tumbled 9.4% against the U.S. dollar this year, making it one of the worst performers among emerging markets.

Wednesday's move keeps the BOK at the forefront of global monetary tightening as inflation threatens to become entrenched for a resource-poor nation grappling with surging energy prices, compounded by the war in Ukraine.

The bigger-than-usual hike comes as other major central banks including the Bank of Canada and the Reserve Bank of New Zealand delivered outsized rate hikes in recent weeks. The U.S. Federal Reserve last month raised its key rate by 75 basis points and is expected to carry out similar-sized moves.

"We view back-to-back 50 basis points hikes by BOK in July and August to be less likely although Governor Rhee could keep the option of an extra +50 bps rate hike on the table," said Citigroup analyst Kim Jin-woo.

"The press conference and the bank's monetary policy statement could highlight a preemptive monetary policy 'tightening' stance to manage inflation expectations."

Governor Rhee Chang-yong will hold a news conference at 0210 GMT.

Most analysts see South Korea's policy rate reaching 2.75% by the end of this year, up from 2.25% in the May poll.

The BOK expects the economy to expand 2.7% this year.