South Korea delivers big interest rate hike, offers dovish hints

South Korea’s central bank has raised interest rates by a half percentage point and flagged more to come as a surging dollar pushed up import costs, but there were signs policymakers may be considering slowing the pace of tightening.

The Bank of Korea (BOK) raised its benchmark policy rate to 3 percent, as expected, following a quarter percentage point hike in August.

However, in a sign central bankers were giving some thought to tempering their aggressive rate hikes, two of the BOK’s seven board members voted for a quarter percentage point hike.

Governor Rhee Chang-yong also acknowledged the pain higher borrowing costs inflicted on many households.

“It doesn’t mean we would absolutely stop there but many of our board members see the level at around 3.50 percent,” Rhee said in response to a question about the possibility of a terminal rate at that level.

South Korea’s three-year treasury bond futures sharply soared after Rhee spoke about dissenters Joo Sang-yong and Shin Sung-hwan on the BOK board.

Joo and Shin voted for a smaller hike in the rate, Rhee said in a news conference, but did not elaborate on their views.

Twenty-three of 26 analysts expected the bank to go for a half-point hike in a Reuters poll, while the remaining three expected a quarter-point hike.

Asked whether South Korea needs another big step hike in November, Rhee said it was too hard to call due to heightened uncertainty over financial markets and global economic growth.

“Many of the market participant took the dissenter news as a sign that the BOK could stop the current tightening cycle when the rate reaches 3.5 percent, as some had seen it peaking at 3.75 percent,” said Yoon Yeo-sam, an analyst at Meritz Securities.

Yoon sees the BOK taking the policy rate to 3.75 percent next year.

The US Federal Reserve’s three 0.75 percentage point hikes have propelled a dollar rally against most other currencies, forcing policymakers around the world to review the risk of new inflation pressures and capital outflows.

The won’s 17 percent slump this year could fuel consumer price gains by making imports more expensive.

The BOK said in a statement following its policy meeting it sees upside risks to its August inflation projection for this year at 5.2 percent, which warrants continued rate hikes.

Governor Rhee has repeatedly said inflation is the number one priority after it surged to a near 24-year high in July before slowing in August and September.

The BOK’s dovish hints on Wednesday follow the Reserve Bank of Australia’s surprise decision last week to raise rates by a smaller-than-expected 25 basis points hike as it tried to quell inflation without crashing the economy.

The median forecast in the poll showed the BOK’s base rate going to 3.25 percent by year-end and then peaking at 3.5 percent in the first quarter of 2023.

Almost half of the respondents in a Reuters poll expected the base rate to reach 3.75 percent in the first quarter of next year.

The BOK was one of the world’s first central banks to shift to a tightening cycle from loose crisis-mode monetary settings last year and has persisted with an aggressive series of rate hikes since.

After Wednesday’s rate hike, the Korea Federation of Small and Medium Business expressed “serious concern” about higher rates.

“We urge the government to prepare financial support measures such as expanding policy funds so that SMEs who are temporarily in crisis do not collapse in the current complex economic crisis,” it said in a statement.