Amid a brighter economic outlook and inflationary pressures, the Bank of Korea (BoK) has become the first major central bank in Asia to start normalizing monetary policy by hiking its benchmark interest rate, Scotia Economics reported.
The bank raised its benchmark by 25 basis points to 0.75%, which represented a modest surprise to analysts. Scotia noted that a “small majority” of analysts expected the bank to leave rates unchanged.
“Despite persistent uncertainties related to Covid-19, reduced monetary accommodation was needed in South Korea on the back of rising financial imbalances as well as inflation and economic growth considerations,” Scotia said in a research note.
The country’s labour market continues to improve as fiscal policy remains supportive, Scotia said, “and the government aims to speed up the country’s vaccination program significantly over the next month, underpinning the outlook for domestic demand.”
Still, household debt “reached a record high in mid-2021,” as house prices continued to climb rapidly, Scotia noted.
“Accordingly, preventing financial imbalances from worsening significantly has become an increasingly important policy priority,” Scotia added. “The BoK will pay close attention to financial stability in the face of approaching monetary policy changes in major economies.”
Despite this current rate hike, Scotia suggested that the BoK “will likely stay on hold in the near-term to monitor how the economic outlook and associated risks evolve.”