South Korea’s central bank lifts benchmark rate to cool inflation

South Korea’s central bank has lifted its benchmark interest rate by a quarter percentage point while raising its inflation forecast for the year.

The latest hike by the Bank of Korea (BOK) on Thursday takes the key interest rate to 2.5 percent.

Governor Rhee Chang-yong said cooling rising prices would remain the BOK’s priority, describing as “appropriate” market expectations that the key rate could reach 2.75 or 3 percent by the year’s end.

“As long as our growth rate stays relatively sound compared with other countries, making sure inflation is under control first would be helpful for everyone in the medium- to long-term,” Rhee said at a news conference in Seoul.

Last month, the BOK raised the key rate by half a percentage point, the biggest increase since the bank adopted its current framework in 1999.

The BOK raised this year’s inflation forecast to 5.2 percent, up from 4.5 percent, which would be the fastest in almost a quarter of a century. Inflation in Asia’s fourth-largest economy hit 6.3 percent in July, the highest rate since November 1998.

The central bank also cut its 2022 economic growth forecast to 2.6 percent, down from 2.7 percent, predicting growth to slow further to 2.1 percent in 2023.

The BOK began raising interest rates before most central banks in the region, and investors are seeking clues about how high rates may go as policymakers try to balance the need to cool inflation and support slowing growth.

“With the much higher-than-expected inflation forecast for next year, we cannot rule out the possibility that the BOK could continue raising interest rates in 2023,” said Paik Yoon-min, a fixed-income analyst at Kyobo Securities.

“Until now, the consensus for the year-end rate was at 2.75 percent but with the revision of forecasts, I think the market consensus could change to 3 percent.”