S.Korea delivers another big hike but offers dovish hints

The logo of the Bank of Korea is seen on the top of its building in Seoul, South Korea, July 14, 2016. REUTERS/Kim Hong-Ji/File Photo
  • S.Korea base rate hiked 50 bps to 3.00%, as expected
  • Two of seven board members dissented, called for 25 bp hike
  • Median forecast of analysts: base rate reaching 3.50% by Q1 2023

SEOUL, Oct 12 (Reuters) - South Korea's central bank raised interest rates by a half percentage point on Wednesday and flagged more to come as a surging dollar pushed up import costs but there were signs policymakers may be considering slowing the pace of tightening.

The Bank of Korea (BOK) raised its benchmark policy rate (KROCRT=ECI) by 50 basis points to 3.00%, as expected, bringing total rates hike since August last year to 250 basis points.

However, in a sign central bankers were giving some thought to tempering their aggressive rate hikes, two of the BOK's seven board members voted for a 25 basis point hike.

Governor Rhee Chang-yong also acknowledged the pain higher borrowing costs inflicted on many households and businesses and nodded to a terminal rate for policy at 3.50%.

"It doesn't mean we would absolutely stop there but many of our board members see the level at around 3.50%," Rhee said in response to a question about the possibility of a terminal rate at that level.

South Korea's three-year treasury bond futures sharply soared by nearly 100 ticks to 102.33 from session lows after Rhee spoke about dissenters Joo Sang-yong and Shin Sung-hwan on the BOK board.

Joo and Shin voted for a smaller hike in the rate, Rhee said in news conference, but did not elaborate on their views.

Twenty-three of 26 analysts expected the bank to go for a half-point hike in a Reuters poll, while the remaining three expected a quarter-point hike.

Asked whether South Korea needs another big step hike in November, Rhee said it was too hard to call due to heightened uncertainty over financial markets and global economic growth.

"Many of the market participant took the dissenter news as a sign that the BOK could stop the current tightening cycle when the rate reaches 3.50%, as some had seen it peaking at 3.75%," said Yoon Yeo-sam, an analyst at Meritz Securities.

Yoon sees the BOK taking the policy rate to 3.75% next year.

The U.S. Federal Reserve's three 75-basis-point hikes have propelled a dollar rally against most other currencies, forcing policymakers around the world to review the risk of fresh inflation pressures and capital outflows.

Reuters Graphics

The won's 17% slump this year could fuel consumer price gains by making imports more expensive.

The BOK said in a statement following its policy meeting it sees upside risks to its August inflation projection for this year at 5.2%, which warrants continued rate hikes.

Governor Rhee has repeatedly said inflation is the No.1 priority after it surged to near 24-year high in July before slowing in August and September.

The BOK's dovish hints on Wednesday follow the Reserve Bank of Australia surprise decision last week to raise rates by a smaller-than-expected 25 basis point hike as it tried to quell inflation without crashing the economy.

The median forecast in the poll showed the BOK's base rate going to 3.25% by year-end and then peaking at 3.50% in the first quarter of 2023.

Almost half of respondents in the Reuters poll expected the base rate to reaching 3.75% in the first quarter of next year.

The BOK was one of the world's first central banks to shift to a tightening cycle from loose crisis-mode monetary settings last year and has persisted with an aggressive series of rate hikes since.

After Wednesday's rate hike, the Korea Federation of Small- to Medium-sized Enterprises expressed "serious concern" about higher rates.

"We urge the government to prepare financial support measures such as expanding policy funds so that SMEs who are temporarily in crisis do not collapse in the current complex economic crisis," it said in a statement.

Additional reporting by Choonsik Yoo, Jihoon Lee; Editing by Sam Holmes

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