Benchmark Interest Rate Outlook for 2022
The Bank of Korea (BOK) has been under pressure for interest rate hikes amid growing concerns over rising inflation and household debt. The central bank raised its benchmark interest rate by 25 basis points to 1.25% in mid-January 2022, which was the third interest rate hike during the COVID-19 pandemic following its previous rate hikes in August and November 2021. The rate had been kept at a record low of 0.5% since May 2020. The latest rate increase has brought the policy rate back to the pre-pandemic level.
(Source: Bank of Korea as of Jan 14, 2022)
Throughout the year 2022, more rate increases are likely to come as the BOK Governor hinted at the possibility of further rate hikes via an online press briefing on January 14. Whether the central bank will further raise the base rate depends on economic conditions including the pace of GDP growth and inflationary pressure. Indeed, growing inflation was a major factor that led the BOK to make a series of rate adjustments recently. In 2021, consumer prices rose by 2.5%, the sharpest rate in a decade, which compared with a 0.5% increase in 2020. The upward trend has continued into early 2022, driven by surging fuel and food prices. As the Consumer Price Index (CPI) gained by 3.6% in January 2022 from a year earlier, it remained above the BOK’s 2% target for a 10th straight month. It was the fourth consecutive month that consumer prices rose by more than 3%. Annual inflation may jump to an 11-year high of around 3% in 2022.
Investment companies from both home and abroad released forecasts that the BOK will lift interest rates further by the end of this year. In early February, JP Morgan and Goldman Sachs both announced their expectations that the BOK will additionally raise its benchmark rate twice to 1.75% in the second half of 2022. In mid-February, Hana Financial Investment Company said it expected the central bank in Korea to continue its monetary policy normalization and increase the rate to 2% by the end of 2022, which is 0.25%p higher than its earlier forecast of 1.75%.