S.Korea delivers another big hike but offers dovish hints (updated)

Shinsung Tongsang Co

12/10/2022 02:02

* 
      S.Korea base rate hiked 50 bps to 3.00%, as expected
    

        * 
      Two of seven board members dissented, called for 25 bp
hike
    

        * 
      Median forecast of analysts: base rate reaching 3.50% by
Q1 2023
    

  
 (Adds comments from BOK Governor Rhee)
    By Cynthia Kim and Joori Roh
       SEOUL, Oct 12 (Reuters) - South Korea's central bank
raised interest rates by a half percentage point on Wednesday
and flagged more to come as a surging dollar pushed up import
costs but there were signs policymakers may be considering
slowing the pace of tightening.
    The Bank of Korea (BOK) raised its benchmark policy rate
 KROCRT=ECI  by 50 basis points to 3.00%, as expected, bringing
total rates hike since August last year to 250 basis points.
    However, in a sign central bankers were giving some thought
to tempering their aggressive rate hikes, two of the BOK's seven
board members voted for a 25 basis point hike.
    Governor Rhee Chang-yong also acknowledged the pain higher
borrowing costs inflicted on many households and businesses and
nodded to a terminal rate for policy at 3.50%.
    "It doesn't mean we would absolutely stop there but many of
our board members see the level at around 3.50%," Rhee said in
response to a question about the possibility of a terminal rate
at that level.
    South Korea's three-year treasury bond futures  KTBc1 
sharply soared by nearly 100 ticks to 102.33 from session lows
after Rhee spoke about dissenters Joo Sang-yong and Shin
Sung-hwan on the BOK board.
    Joo and Shin voted for a smaller hike in the rate, Rhee said
in news conference, but did not elaborate on their views.
    Twenty-three of 26 analysts expected the bank to go for a 
half-point hike in a Reuters poll, while the remaining three
expected a quarter-point hike.
    Asked whether South Korea needs another big step hike in
November, Rhee said it was too hard to call due to heightened
uncertainty over financial markets and global economic growth.
    "Many of the market participant took the dissenter news as a
sign that the BOK could stop the current tightening cycle when
the rate reaches 3.50%, as some had seen it peaking at 3.75%,"
said Yoon Yeo-sam, an analyst at Meritz Securities.
    Yoon sees the BOK taking the policy rate to 3.75% next year.
    The U.S. Federal Reserve's three 75-basis-point hikes have
propelled a dollar rally against most other currencies, forcing
policymakers around the world to review the risk of fresh
inflation pressures and capital outflows.
    The won's 17% slump this year could fuel consumer price
gains by making imports more expensive.
    The BOK said in a statement following its policy meeting it
sees upside risks to its August inflation projection for this
year at 5.2%, which warrants continued rate hikes.
    Governor Rhee has repeatedly said inflation is the No.1
priority after it surged to near 24-year high in July before
slowing in August and September.
    The BOK's dovish hints on Wednesday follow the Reserve Bank
of Australia surprise decision last week to raise rates by a
smaller-than-expected 25 basis point hike as it tried to quell
inflation without crashing the economy.
    The median forecast in the poll showed the BOK's base rate
going to 3.25% by year-end and then peaking at 3.50% in the
first quarter of 2023.
    Almost half of respondents in the Reuters poll expected the
base rate to reaching 3.75% in the first quarter of next year.
    The BOK was one of the world's first central banks to shift
to a tightening cycle from loose crisis-mode monetary settings
last year and has persisted with an aggressive series of rate
hikes since. 
    After Wednesday's rate hike, the Korea Federation of Small-
to Medium-sized Enterprises  SMEs  expressed "serious concern"
about higher rates.
    "We urge the government to prepare financial support
measures such as expanding policy funds so that SMEs who are
temporarily in crisis do not collapse in the current complex
economic crisis," it said in a statement.
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South Korea's policy rate at a 10-year high    https://tmsnrt.rs/3elbvm3
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 (Additional reporting by Choonsik Yoo, Jihoon Lee; Editing by
Sam Holmes)
 ((Cynthia.Kim@thomsonreuters.com; 822 3704 5655; Reuters
Messaging: cynthia.kim.thomsonreuters.com@reuters.net))