Inflation in Asia's fourth-largest economy accelerated to nearly the highest in a decade in October, reinforcing the need for the Bank of Korea (BOK) to act now to prevent it from accelerating further.
All but one of 30 economists in a Nov. 15-22 Reuters poll predicted the BOK would raise its base rate by 25 basis points to 1.00% at its Nov. 25 policy meeting.
One dissenter predicted a 50 basis point hike, which if realised would bring rates back to 1.25%, where they were before the pandemic.
"We believe the current economic conditions are strong enough to allow the BOK to proceed with a further rate hike, in order to contain the rise in inflation or inflation expectations and stabilise the property market," said Ma Tieying, an economist at DBS in Singapore.
Most economists have brought forward their forecasts for rate hikes and agree there is more tightening coming, and see the interest rate reaching 1.25% in the first quarter of next year and 1.50% by end-2022.
Although medians predict the base rate to remain steady thereafter, a few respondents forecast rates to reach as high as 2.00% by end-2023.
"We think one or two more hikes are possible during next year given higher inflation than the BOK's target," said Ji-man Kim, an economist at Samsung Securities in Seoul. "We think the Monetary Policy Board will continue to pay attention to financial stability as long as the increase in household loans remains high."
The consumer price index (CPI) jumped 3.2% from a year earlier in October, the highest since January 2012 and the seventh straight month above the central bank's 2% target.
As in most economies, supply-side pressures and elevated oil prices are likely to keep inflation high for a while. The central bank will announce revised inflation forecasts on Thursday.
High levels of household debt and rapidly rising real estate prices will also figure prominently in Thursday's policy decision.
Koreans have been borrowing more than ever before and household debt is now roughly equivalent to the country's GDP. A few economists polled said that surge has showed some signs of slowing since the last rate hike in August.
Still, household debt levels in South Korea are among the highest globally and policymakers are increasingly worried that skyrocketing property prices have become a risk to the economy.
That, along with waning pandemic-related stimulus and an economic slowdown in China, the country's largest trade and investment partner, will weigh heavily on the economy next year.
"Macro uncertainties have increased...(and) overall macro policy uncertainty is also getting elevated in a run-up to the March presidential election," noted Maggie Wei, an economist at Goldman Sachs.
"While our baseline scenario remains for two 25bps hikes next year...the risk is slightly skewed to the dovish side with a possible shift of the first hike next year to the second half, broadly in sync with our forecast for the pace of monetary policy normalization in the U.S."
(Reporting by Vivek Mishra; Polling by Shaloo Shrivastava, Devayani Sathyan and Md. Manzer Hussain; Editing by Ross Finley, William Maclean)
By Vivek Mishra
