By Kwanwoo Jun
South Korea's central bank has brought its base rate back to a pre-pandemic level, raising it for a third time in less than half a year to fight inflation.
To balance the tapering of monetary support for the economy, which still faces the spread of the Covid-19 Omicron variant, the finance ministry separately moved to draw up nearly $12 billion in additional budget spending to bolster fiscal stimulus.
The divergence in monetary and fiscal policy is in response to a mixed bag of economic conditions--accelerating inflation even amid lingering uncertainties about the pandemic that has hurt small businesses and consumer spending in Asia's fourth-largest economy.
The Bank of Korea's board decided in a 6-1 vote to raise rates on Friday and it lifted the benchmark seven-day repurchase rate by 25 basis points to 1.25%. The bank had raised the rate in August and November.
BOK Gov. Lee Ju-yeol signaled more rate increases could come later this year as he still viewed the current rate as accommodative. "Even raising the base rate further to 1.50% shouldn't be seen as tightening policy yet," Mr. Lee told an online news conference.
As the BOK announced its decision, Finance Minister Hong Nam-Ki separately said his office was preparing a supplementary budget worth 14 trillion won ($11.80 billion) by late January to support small merchants and businesses hit by pandemic-related quarantine restrictions.
Sixteen of 19 analysts surveyed by The Wall Street Journal had forecast a rate increase in January. Most analysts have penciled in further rate increases later in 2022 as the bank is also seeking to help cool red-hot housing markets amid low borrowing costs.
The BOK--like other major central banks--is dialing back pandemic-era stimulus as the economy recovers and inflation accelerates at a faster-than-expected pace.
Inflation averaged 2.5% in South Korea in 2021, overshooting the bank's forecast of 2.3%. It has remained above the bank's 2.0% target for nine straight months.
Mr. Lee said Friday he expects inflation to rise above 3% for a while and average more than 2.5% for 2022, sharply higher than the bank's earlier forecast of 2.0%.
The BOK forecasts South Korea's economy expanded 4.0% in 2021, following a 0.9% contraction in 2020. The bank expects 3.0% growth in 2022.
Capital Economics Asia economist Alex Holmes took note of the BOK's back-to-back rate increases--the first such move since 2007--despite economic risks from the Omicron variant. "Today's move suggests that the Bank isn't too worried about the economic impact of the virus," Mr. Holmes said. He expects the BOK to take the policy rate up to 2.00%, rather than 1.75%, in 2022.
Write to Kwanwoo Jun at email@example.com
(END) Dow Jones Newswires