By Cynthia Kim and Jihoon Lee
SEOUL, July 16 (Reuters) – South Korea’s central bank raised its benchmark interest rate for the first time in three-and-a-half years on Thursday and flagged more to come, as brisk growth in Asia’s fourth-largest economy fanned inflation risks.
The seven-member monetary policy board at the Bank of Korea voted to raise the seven-day repurchase rate by 25 basis points to 2.75% to stabilise a slumping won and counter persistent inflationary pressure.
In a statement released shortly after, the bank also said the growth rate for South Korea is expected to “considerably exceed” the bank’s May forecast of 2.6%, while inflation will remain high for “a considerable time.”
“There are good reasons to expect further tightening over the coming months,” Capital Economics economist Gareth Leather wrote in a note after the rate decision was announced.
“Although the continued weakness in private consumption – retail sales are falling in real terms – remains a concern, we still expect growth to reach an above-consensus 4.0% this year.”
The dollar-won rate remained muted on the widely expected decision. The benchmark KOSPI was off 7%, mostly due to renewed selling in chipmakers’ stocks.
The economy has been rebounding faster than expected this year, thanks to a boom in semiconductor exports and investment, even as the local currency remains pressured, with the won weakening 3.4% against the greenback.
Gross domestic product expanded 1.8% in the first quarter, the fastest pace in nearly six years, prompting the government to raise growth forecasts to a five-year high of 3.0% for this year on the back of a global semiconductor boom.
The rate hike aligns the BOK closely with regional neighbour the Bank of Japan, which recently raised its own benchmark rate to a 31-year high.
Central banks in Australia, New Zealand, Indonesia and the Philippines have also tightened their monetary policies.
With the headline inflation figure at a 2-1/2-year high in South Korea, a majority of analysts see the BOK delivering at least one more rate hike before the end of this year to take the policy rate to 3.00%.
Median forecasts showed the BOK would raise its key rate to 3.25% in the first quarter of 2027 and keep it there until at least the end of next year.
Governor Shin Hyun Song will hold a press conference at 0210 GMT, which will be livestreamed via YouTube.
(Reporting by Cynthia Kim and Jihoon Lee; Editing by Sam Holmes)
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