Bank of Korea Raises Benchmark Rate as Inflation Hits

South Korea’s central bank on Friday raised its benchmark interest rate by 25 basis points to 1.25%, the highest since March 2020.

The move came after inflation reached 2.5% in 2021, well above the bank’s 2% target.

“The decision was made as consumer prices are likely to increase more than expected and there is a strong need to reduce financial imbalances,” Bank of Korea (BoK) governor Lee Ju-yeol said.

Analysts expect the BoK to increase interest rates a few times more this year as Lee’s comments herald additional tightening, after the Federal Reserve signalled its intention to raise rates three times this year.

“The BoK has made clear that its main priority is controlling financial risks amid surging house prices and household debt,” Alex Holmes, Asia economist at Capital Economics, said.

The BoK expects Asia’s fourth-largest economy to grow 3% this year, slowing from 4% in 2021.

“Interest rates still remain accommodative relative to the real economy,” Lee said. “So we need to adjust interest rates further, depending on the economic circumstances going forward.”

Earlier, South Korea’s prime minister, Kim Boo-kyum, said the government would submit a supplementary budget to the national parliament aimed at boosting small enterprises and the self-employed.

The government plans to submit the extra budget bill to parliament this month, adding to a record 607.7 trillion won ($511 billion budget for this year.

George Russell, with Reuters

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George Russell

George Russell is a freelance writer and editor based in Hong Kong who has lived in Asia since 1996. His work has been published in the Financial Times, The Wall Street Journal, Bloomberg, New York Post, Variety, Forbes and the South China Morning Post.