Korea – May BOK meeting

The BOK was hawkish today. It raised rates; revised up its forecasts for inflation; and added to its statement a new phrase that the “Board sees it as warranted to conduct monetary policy with more emphasis on inflation for some time”.

As widely expected, the BOK raised rates by another 25bp today, the fifth increase in the current hiking cycle.

The bank moderated its overall growth expectations, mainly because of exports and capex. It reduced its GDP forecasts for 2022 to 2.7% (from the 3% estimate made in February) and to 2.4% for 2023 (from  2.5%). But it was more constructive on the outlook for the private expenditure, noting:

consumption has improved rapidly supported by the lifting of social distancing restrictions.

At the same time, there was no moderation in its expectations for inflation. Indeed, the BOK thinks inflation will be higher even than it thought at its last meeting. In April, the BOK had talked about inflation remaining “high in the 4% range”, but today said:

consumer price inflation will remain high in the 5% range for some time, and run at the mid-4% level for the year overall, substantially above the February forecast of 3.1%.

The CPI raised its CPI forecasts to 4.5% for 2022 and 2.9% for 2023, from 3.1% and 2% respectively. That means the bank expects inflation to exceed comfortably its target for two consecutive years. While the BOK previously attributed inflation to global factors like supply side disruptions and higher commodity prices, today it added the lifting of domestic social distancing measures to the list of drivers.

With activity remaining firm, it isn't surprising that the bank remains hawkish. But just in case that wasn't clear enough, the BOK made an important change to the last paragraph of its statement. For some time, the bank has been pledging to “appropriately adjust the degree of monetary policy accommodation” given the recovery in activity and rise in inflation. Today, it replaced this phrase with:

The Board sees it as warranted to conduct monetary policy with more emphasis on inflation for some time

Given the BOK seems to have been behind the curve on inflation developments so far, it is worth asking whether it has now gone overboard and that nominal growth is about to disappoint. Its own consumer and business survey data for May don't suggest a big change is in the works just yet. The big risk is probably the continuing economic problems in China.