Image: Reuters Berita 24 English - The rate of inflation in South Korea in June increased at its quickest rate since the Asian financial cr...
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| Image: Reuters |
Berita 24 English - The rate of inflation in South Korea in June increased at its quickest rate since the Asian financial crisis, raising hopes that the central bank may introduce a 50 basis point rate increase for the first time next week in an effort to lower prices and stop capital flight.
According to government data released on Tuesday, the consumer price index (CPI) increased by 6.0 percent in June relative to a year earlier, which was the fastest increase since November 1998 and beyond the central bank's 2 percent objective for the fifteenth consecutive month.
The CPI increased faster than expected, surpassing the 5.9 percent predicted in a Reuters survey, from a rise of 5.4 percent the previous month.
Before the Bank of Korea's next rate decision on July 13, Governor Rhee Chang-yong stated that he would maintain the option of a potential 50 basis point hike open while monitoring important economic data.
If implemented, it would be the first time in the history of the central bank to raise interest rates by half a percentage point.
BOK deputy governor Lee Hwan-seok stated the bank "has to be particularly attentive against further strengthening of inflationary expectations" in a meeting held after the announcement of the inflation statistics. He also added that present inflation trends will persist for the time being.
Three-year treasury bond futures for September increased by 0.15 points, while 10-year bond futures increased by 0.09 points. The won was slightly higher and the Kospi was up 1.77 percent at 2,341.08.
The BOK joined a global wave of policy tightening as central banks struggle with price surges not seen in decades by delivering five 25-basis-point interest rate increases since late August, raising rates to 1.75 percent, the highest since mid-2019.
After the U.S. Federal Reserve increased its rate by 75 basis points in June, there has been an increase in the likelihood of a 50 basis point increase.
According to many market observers, the BOK would aim to limit the rate differential between South Korea and the US in order to prevent any capital outflows.
The potential of a significant step increase in July is raised by this data, according to Ahn Jae-kyun, an analyst at Shinhan Financial Investment.
Even if the headline inflation didn't reach 6 percent, the BOK currently has all the proper grounds to take a significant move because inflation expectations are at a high level.
The BOK said it would carefully evaluate the constraints of debt repayment to determine if a half-percentage point raise would be reasonable because it believes the inflation trajectory will be higher than previously predicted.
However, analysts have cautioned that the BOK shouldn't rush rate increases due to record-high consumer debt and sluggish export development.
South Korean exports grew at the slowest rate in 19 months in June, which increased worries about the state of the economy.
According to Park Seok-gil, an analyst at JPMorgan Chase Bank, "policymaking will become all the more difficult as they have a combination of upside inflation risks and downside economic growth risks persisting for the time being." "We anticipate the BOK to boost rates by 50 bps in July and by three bps each in the next three months of this year."
The core CPI increased by 3.9 percent from a year ago, the quickest rate since February 2009. The core CPI eliminates volatile food and energy prices.
The monthly increase in the CPI for June was 0.6 percent, above the survey's estimate of 0.5 percent.
