Bank of Korea to raise interest rate by 25bps on Nov 24 as growth slows – Reuters poll By Reuters

© Reuters. FILE PHOTO: The Bank of Korea logo is seen in Seoul, South Korea, November 30, 2017. REUTERS/Kim Hong-Ji

By Devayani Sathyan and Anant Chandak

BENGALURU (Reuters) – South Korea’s central bank will ease the pace of tightening and raise interest rates by a modest 25 basis points on Thursday amid high inflation and signs of slowing domestic growth despite an hawkish U.S. Federal Reserve.

South Korea’s economic growth has been decelerating in the latest measure as higher living costs exceed household incomes and dampen demand, putting pressure on the Bank of Korea (BoK) to balance inflation and growth.

Still, with inflation at 5.7%, well above the central bank’s 2% target in October, coupled with aggressive Fed tightening, the Bank of Korea has a bit more work to do before taking a break.

All but one in 30 economists polled from November 15-21 predicted the BoK would raise its policy rate by 25 basis points to 3.25% on Thursday. One expected a 50 basis point increase.

If the majority opinion prevails, the BoK will raise the interest rate to the highest level since 2012.

“The combination of still high inflation and the US Federal Reserve means there is more room for the central bank’s rate hike cycle to continue,” said Crystal Tan, an economist at ANZ.

“Amid growing concerns about growth and the credit market, the case for a more gradual pace hike has become stronger.”

About 60% of respondents, or 17 out of 30, predict another 25 basis point hike to 3.50% by the end of March. Eleven forecast rates will rise to 3.75% by then. The other two expected no change from 3.25%.

Median forecasts showed the base rate to remain at 3.50% until the end of 2023. If it materializes, the BoK will be one of the first Asian central banks to end its policy tightening cycle.

“We think the BoK will note slowing growth and inflation and rising financial stability concerns, and BoK rhetoric is likely to strike a more nuanced tone,” said Asia economist Derrick Kam. Morgan Stanley (NYSE:).

“The risk to our call is a more extended hiking cycle. This would be if global commodity prices rise due to geopolitical and/or supply concerns, or if market expectations of Fed tightening show another hawkish bias and trigger another bout. KRW weakness in.”