Bank of Korea likely to hike interest rate by 25 bps in November

The South Korean central bank is set to meet this week for interest rate decision. According to a DBS Bank research report, the Bank of Korea is expected to hike 25 basis points. The governor has been hinting at rate hikes in the past couple of months, to address the risk of financial imbalances.

Property prices have continued to rise sharply, boosting worries about the side effects of an accommodative monetary policy. While capital outflows are not a serious issue for the time being, the Korean central bank also seems cautious regarding the potential risks, given the prospects of widening negative KRW/USD rate differentials, and the high degree of foreign participation in the KRW bond market.

The third quarter economic growth came in below expectations, growing 2 percent. The labor market continued to be sluggish with the jobless rate falling just slightly to 3.9 percent in October from August’s peak of 4.2 percent.

“While inflation touched the BOK’s 2 percent target in October, core CPI remained low and stable at 1.1 percent. Given the weak macroeconomic prospects, we now expect the BOK to pause after this week’s move and keep rates flat at 1.75 percent next year”, added DBS Bank.