Bank of Korea Raises Rates for First Time in Over 6 Years -- Update

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11/30/2017 | 06:07 am


By Kwanwoo Jun



SEOUL--South Korea became the first major Asian economy to raise its main policy rate since the Federal Reserve started increasing U.S. rates two years ago, the latest sign of a global move away from crisis-era stimulus measures.



The Bank of Korea increased rates on Thursday for the first time in more than six years in response to faster-than-expected growth this year and an uptick in inflation as a strengthening U.S. economy, a recovery in Europe and unexpected resilience in Chinese growth drive a synchronized global expansion.



Bank of Korea governor Lee Ju-yeol said at a news conference that the widely expected decision to raise the policy rate by a quarter percentage point to 1.5% wasn't unanimous, with one dissenting board member calling for holding the rate steady. That indicates that another rate increase may take some time.



Governor Lee declined to comment on the number of likely rate increases.



The rate increase came just a day after North Korea's latest missile provocation left Asian markets largely unruffled, indicating little need for the central bank to delay a move that is likely to herald a wave of similar decisions across Asia.



Of 17 market analysts surveyed by The Wall Street Journal ahead of the decision, 14 said they expected the bank to raise the base rate at the latest policy meeting. They cited the country's fastest expansion in over seven years in the third quarter as a factor calling for less support for the economy. Brisk exports powered by a smartphone-driven tech boom and increased government spending have fueled growth.



Samsung Electronics Co. is a key player in the world's tech-supply chain, manufacturing smartphones, memory chips and display panels for its own Galaxy models and also for Apple Inc.'s iPhones.



Seoul's left-leaning government, meanwhile, has ramped up fiscal stimulus to boost welfare spending and create more public jobs since it came to power in May.



Goldman Sachs said in a recent report that a wave of rate increases starting in South Korea would likely spread across Asia to Malaysia and Taiwan next year, and Thailand in 2019, as those emerging economies enjoy robust growth, inflationary pressure and the impact of further U.S. rate increases.



Major global central banks have recently been in a tightening mode. The Fed has raised rates twice this year, with another increase expected in December. The Bank of Canada raised rates in back-to-back meetings in the summer, and the Bank of England raised rates in November for the first time in a decade. The European Central Bank is set to dial back its bond-buying program in January.



Seoul's policy makers expect economic growth this year to top even their latest 3% forecast. The Organization for Economic Cooperation and Development Wednesday raised its growth estimate for Korea to 3.2% this year.



The International Monetary Fund upgraded its view to 3.2% earlier in November. The IMF also said that monetary conditions would support growth even if interest rates were raised a few times.



Still, the central bank is expected to proceed gradually with rate increases. While consumer inflation is hovering around the central bank's 2% target, up from an average of 1% in 2016, it shows few signs of pushing sharply higher.



DBS economist Tieying Ma said she expects the Bank of Korea to raise rates at half the speed of previous tightening cycles to reach 2.25% by the end of 2019.



Ms. Ma cited Korea's declining long-term growth potential, its weaker inflation trend and the stronger local currency.



Write to Kwanwoo Jun at [email protected]





Corrections & Amplifications



This item was corrected on November 30, 2017 at 0733 GMT to reflect that DBS economist Tieying Ma expects the Bank of Korea to raise rates to reach 2.25% by the end of 2019, not the end of next year.



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