BOK chief projects inflation rates to remain at over 5%

“It is very clear that inflation rates will exceed 5% in June, July and August. In particular, if the global crop prices remain on upward trajectory, the rates may remain at over 4% even until early 2023,” Bank of Korea Gov. Rhee Chang-yong said after raising the annual base rate in just a month from 1.50% to 1.75% on Thursday.

Rhee’s remarks show that he had no option but to place his strongest card on the table in 15 years, raising the rates for two consecutive months to rein in inflation that are going out of control. He also hinted at the central bank’s consideration of additionally raising base rates in coming months of July and August or taking a “big step” of having 50 basis point hikes at once.

In its adjusted economic outlook announced on Thursday, the Bank of Korea raised its consumer inflation rates for this year to 4.5%, which is up 140 basis points from its earlier predictions of 3.1%. It is rare for the central bank to announce the inflation predictions of over 4%, the highest in a decade and 10 months since July 2011 (4.0%). If this forecast is realized, the annual inflation rate will reach 14-year highs since the global financial crisis of 2008 (4.7%).

“Our predictions were made under the basic assumptions that, by the end of this year, the global oil price may decline to $99 a barrel, and Russian invasion of Ukraine will be put to an end with the disrupted global supply chain back on normalcy,” Gov. Rhee explained.

However, there are rising concerns that an unexpectedly prolonged war on Ukraine is likely to contribute to inflation soaring even more. “Even if the global oil prices fall, we are seeing a rise in the crop price which tends to maintain a high level for a long time once it goes up, having a direct impact on the cost of living, including grocery prices,” Gov. Rhee said. “This can drive up expected inflation rates.” Already, the expected inflation rates in May hit the highest (3.3%) in nine years and seven months, causing inflationary pressure.

He also projected that inflation may maintain its level at over 4% for a while next year. In our forecast in March, we predicted that inflation may stay up in the first half, taking a fall in the second half. But at the current trend, we cannot rule out the possibility of the peak-out of inflation through the middle of this year.

Rhee’s comments hint at two to three rounds of additional interest rate hikes in the rest four monetary policy setting meetings. He also added, “back-to-back base rate rises in July and August will be decided upon upcoming data, without ruling out taking special methods.”


Min-Woo Park minwoo@donga.com