Bank of Korea raises key interest rate for second consecutive month, defying expectations

The Bank of Korea's Monetary Policy Board delivered a surprise on Oct. 27, raising the benchmark interest rate by 0.25 percentage points to 3.00%. This marks the second consecutive monthly increase, a move that defied widespread expectations. A survey of 100 bond market experts conducted just before the meeting revealed that 79 anticipated the rate would remain unchanged.

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It is outside the norm, and it means we have given a strong signal to the market.

Governor Shin Hyun-song acknowledged the decision was "outside the norm" and intended to send a strong signal to the market. He employed the "hoe-mi" (spade) analogy, suggesting it's better to address potential problems early with a small tool than to face larger consequences later. "Many research results show that proactively responding early, before inflation expectations spread, ultimately minimizes the costs to the economy," Shin explained.

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Many research results show that proactively responding early, before inflation expectations spread, ultimately minimizes the costs to the economy.

The primary driver for the rate hike was persistent inflationary pressure. While the headline consumer price index eased to 2.8% in July, core inflation, which excludes food and energy, reached a high of 2.6% year-on-year. Shin expressed concern that the "underlying trend" of core inflation has been revised upward, indicating inflation could be broad-based and prolonged.

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We are concerned that core inflation, which shows the underlying trend, has been revised upward from the May forecast, and that the pace of inflation will be broad-based and prolonged.

Strong economic growth also contributed to the decision. The Bank of Korea revised its economic growth forecasts upward significantly, projecting 3.3% for this year and 2.9% for next year, a notable increase from the previous 2.6% and 2.1% estimates. Despite one dissenting vote favoring a freeze, Shin stated there was a general consensus on the need for rate hikes, with the dot plot indicating a median forecast of a rate above 3.25% within six months, suggesting further increases are likely.

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Since we have raised rates twice in a row, sending a strong signal to all economic agents, we need to check the ripple effects.