By Cynthia Kim
SEOUL (Reuters) – South Korea is expected to become the first major Asian economy to raise interest rates since the pandemic began on Thursday to curb surging household debt and cool brisk consumer prices and an overheating housing market.
A slim majority of analysts polled by Reuters expect the Bank of Korea to raise the benchmark interest rate from a record low at its policy meeting that starts at 0000 GMT.
A hike would the first since Governor Lee Ju-yeol and his board raised the benchmark interest rate in November 2018.
A 25 basis point increase to 0.75% and possible forecasts for more tightening would be underpinned by growing inflationary pressures and the strong export-led recovery.
Analysts say South Korea needs to be ahead of the curve as surging household debt and home prices threaten financial stability.
“BOK’s concerns about financial imbalances may outweigh the downside risk to economic growth from the Delta variant,” said Kim Jin-wook, an analyst at Citibank said in a report, who sees a hike at Thursday’s policy decision.
“We now bring forward the timing of our second hike call to 1.00%, to November 2021 from January 2022.”
Policymakers have been signalling higher rates since May but expectations for a rate hike were pared recently due to the latest COVID-19 outbreak, which forced Asia’s fourth-largest economy into semi-lockdown in July.
Central banks around the world are laying the groundwork for a transition away from crisis-era stimulus as what began as emergency support for collapsing growth now overheats many economies.
Most central banks that have raised rates this year are among emerging economies concerned about capital flight and import inflation. In Asia, Sri Lanka raised rates last week, making it the first in the region to do so.
New Zealand was widely expected to raise borrowing costs last week but delayed the policy move as a fresh coronavirus outbreak cast uncertainty over the economic outlook.
Analysts expect the BOK to raise interest rates next year, with most seeing the base rate at 1.25% by end-2022.
The policy decision will be the first rate review the BOK has had as a six-member body after board member Koh Seung-beom left the board to head the Financial Services Commission regulatory body.
There are two more interest rate review meetings scheduled this year.
Governor Lee Ju-yeol’s news conference begins at 0220 GMT.
(Reporting by Cynthia Kim; Editing by Sam Holmes)
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