South Korea delivers another big hike as Fed rates sink local currency

By Cynthia Kim and Joori Roh

SEOUL (Reuters) – South Korea’s central bank raised interest rates by a half percentage point for a second time since July on Wednesday, as a surging dollar driven by aggressive U.S. monetary policy tightening fanned import inflation.

The Bank of Korea (BOK) raised its benchmark policy rate by 50 basis points to 3.00% on Wednesday, bringing total rates hike since August last year to 250 basis points.

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.

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 pressure and capital outflows.

The won’s 17% slump this year could fuel consumer price gains by making imports more expensive.

Governor Rhee Chang-yong 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 move contrasts with that of the Reserve Bank of Australia last week, which surprised markets with 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 reach 3.75% in the first quarter of next year, suggesting a bias towards higher borrowing rates with inflation at 5.6% in September from the same month a year ago far above the BOK’s 2.0% target.

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

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