The Bank of Korea (BoK) on December 24 said it would adjust its monetary policy next year in an announcement seen as preparing for a rate hike to dampen inflation.

The BoK, which raised the rate to one per cent after two rate hikes in August and November this year to prop up the pandemic-hit economy, is expected to lift the rate in January when the bank’s seven-member board meets. BoK governor Lee Ju-yeol said he would not rule out a hike in the first quarter.

“The financial imbalances – manifested between growth and inflation – along with the changes in monetary policies elsewhere will be key factors to take into account when we decide on a date for our shift,” the BOK said in the annual monetary policy guideline, referring to the US Federal Reserve’s (Fed) tapering.

Last week, the Financial Times reported that the Fed could raise interest rates as early as March to tame inflation, citing a senior US central bank official.

The inflation fight is as serious in South Korea, with producer and consumer prices hitting a record high last month.

The BoK said consumer prices would likely return to a two per cent jump next year, from 3.7 per cent in November this year, which was the highest rise in 10 years. The economy would grow three per cent next year, though supply shortages and the pandemic could drag down growth, it added.

Concerns over a benchmark rate hike are growing because the hike would further slow economic activity and suspend growth, as the country is still riding out the spread of the latest omicron variant and supply chain bottlenecks.

The state-run Korea Development Institute said a rate hike of 25 basis points could knock as much as 0.15 percentage points off the country’s gross domestic product (GDP) growth, saying pandemic fears were still gripping the financial markets.

The BoK’s next policy meeting is on January 14.

THE KOREA HERALD/ASIA NEWS NETWORK