By Ambar Warrick
Investing.com-- The South Korean central bank hiked its benchmark interest rate to its highest level in eight years on Thursday, as it seeks to combat red-hot inflation amid rising commodity prices and slowing economic growth.
The Bank of Korea (BoK) raised its base rate by 25 basis points (bps) 2.50%- making it twice as high as pre-pandemic levels. The move comes in response to inflation touching a 24-year high in July.
Elevated inflation levels saw the BoK hike rates by a bigger-than-expected 50 basis points in July. Thursday’s decision was in line with expectations.
The South Korean economy is facing increased headwinds from elevated commodity prices, which have severely increased its trade deficit and dented the won.
The won rose 0.3% after the decision to 1,337.36 to the dollar. But the currency is trading around lows last seen in 2009.
An economic slowdown in China, which is a major trading partner for the country, has greatly weighed on South Korea’s economy.
The BoK cut its expectations for economic growth in 2022 to 2.6% from 2.7%. It also expects growth to slow to 2.1% in 2023.
The bank raised its inflation forecast for the year to 5.2% from 4.5%. CPI inflation grew at a pace of 6.3% in July.
The BoK was among the first central banks in the world to begin scaling back COVID-era monetary stimulus, having started its hiking cycle in August 2021.
This could also see the bank wind down its tightening cycle earlier than its peers- by as soon as November.
High inflation and rising interest rates are already beginning to weigh on South Korea’s economy. The economy grew by 2.9% in the second quarter, slower than the 3% seen in the first quarter.