S Korea Steps Up Inflation Fight With Surprise Hike

South Korea's central bank raised its benchmark interest rate to the highest level since August 2019 on Thursday in a surprise move aimed at fighting rampant inflation, which threatens the country’s economic recovery.

In its first ever rate review held without a governor, the bank's monetary policy board voted to raise rates by a quarter of a percentage point to 1.50 percent.

Most analysts had expected the Bank of Korea to keep rates unchanged until its new governor assumes office, after Lee Ju-yeol's term as chief ended last month.

Joo Sang-yong, acting chairman of the six-member policy board, said the bank could not wait for the formal appointment of a new governor to continue efforts to slow inflation and warned price growth was likely to top 4 percent for a while.

"A back-to-back rate hike in May is also likely," said Paik Yoon-min, an analyst at Kyobo Securities, who sees the policy rate hitting 2.00 percent by the end of this year.

"If the [US Federal Reserve] starts making big step hikes from May, it will soon catch up on South Korea's base rate and weaken the effectiveness of pre-emptive moves by the BOK."

In a policy statement, the BOK said South Korea's economic growth was projected to be below a February forecast of 3 percent.

At the same time, inflation in South Korea is expected to hold at decade-high levels as Russia's actions in Ukraine send commodity prices soaring.

Thursday's rate decision comes after New Zealand and Canada both delivered 50 basis point hikes and other Asia-Pacific central banks shift their focus away from supporting growth to fighting surging inflation.

Rhee Chang-yong, a veteran International Monetary Fund official and South Korea's nominee to be central bank chief, is expected to start his four-year term after the necessary parliamentary hearing on April 19. (Reuters)