South Korea raises rates for first time in six years, flags job market risks

SEOUL (Reuters) - South Korea’s central bank raised interest rates for the first time in more than six years on Thursday, yet tempered market expectations for more by raising concerns about the job market and other uncertainties.

A South Korea won note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration/Files

North Korea declared on Wednesday it had successfully tested a new intercontinental ballistic missile that put all of the U.S. mainland within range, but markets largely ignored the news.

The Bank of Korea’s Monetary Policy Board voted on Thursday to increase the benchmark rate to 1.50 percent from a record-low of 1.25 percent, ending a five-year easing cycle as a sustained export boom lifts economic growth.

Board member Cho Dong-chul dissented in the 6-1 vote to raising interest rates to 1.50 percent. His dissent, along with some dovish comments, pushed the won down by more than 1 percent against the dollar to as weak as 1,090.2.

Governor Lee Ju-yeol declined to comment at a news conference when asked if he could give any guidance on the near-term direction of monetary policy, simply noting he would closely monitor growth and inflation to assess whether further hikes were needed.

Eighteen of 21 economists polled by Reuters had predicted the Bank of Korea would raise rates on Thursday, while the three others saw rates on hold at the current record-low 1.25 percent.

“Should we have kept the base rate as it was, there was a danger of risks rising as the actual rate of accommodation (in the money market) would have increased,” Lee told news conference in Seoul.

A statement released after the rate decision highlighted worries about fragile job market conditions, while also projecting growth at slightly above the rate estimated in October, suggesting policymakers were tamping down expectations for rapid rate rises.

Crucially, the BOK omitted references to improving employment conditions that have been seen in previous statements saying instead that the job market “has shown signs of weakening somewhat”.

Despite Thursday’s move, the road back to monetary normality will be long.

“Now, there is no dispute that this tightening cycle will be a slow and gradual one. The most important thing from today’s policy meeting is the removal of uncertainties related to policy direction,” said Oh Chang-sob, fixed-income strategist, Korea Investment and Securities.

Thursday’s decision removes the emergency stimulus in force since 2012 to boost the economy, and takes South Korea into tightening territory - a journey that could be joined by other Asian central banks expecting stronger growth.

The U.S. Federal Reserve and the central banks of Britain and Canada have already begun normalising monetary policy, slowing bringing the era of massive stimulus to a close.

South Korea is the only Asian country other than Sri Lanka to have hiked rates since November 2014, when Indonesia raised its borrowing costs.

Markets had priced in Thursday’s rate hike. The won had gained 4 percent against the dollar and South Korean bond yields jumped to a three-year high this month before Thursday as investors gauged that rates could rise in November, far earlier than first thought.

In October the Bank of Korea upgraded its growth outlook for the year to 3 percent from 2.8 percent, and revised up its inflation outlook to 2 percent from 1.9 percent.

Growth in the third quarter showed the biggest jump in seven years, expanding 1.4 percent from three months earlier on a robust export cycle propelled by strong global demand for memory chips.

Those soaring memory chip sales helped South Korea’s tech sector manufacturers to post record operating profits in the third quarter.

Samsung Electronics Co Ltd, the world’s biggest maker of semiconductors, televisions and smartphones, nearly tripled its operating profit in the third quarter from the same period a year earlier, to 14.5 trillion won ($13.34 billion).

SK Hynix Inc’s profit leapt more than five-fold to a record in the third quarter, as demand for memory chips to be used in servers and smartphones soared.

South Korea’s finance minister said this week that the economy was set to expand by more than 3 percent this year, topping the 2.8 percent average growth rate seen over the past five years.

Annual consumer inflation for October was 1.8 percent, short of the BOK’s 2 percent target.

($1 = 1,087.0000 won)

Reporting by Cynthia Kim and Christine Kim; Additional reporting by Dahee Kim; Editing by Eric Meijer