Inflation in South Korea has quickened to its fastest pace since the 1998 Asian financial crisis, intensifying pressure on the Bank of Korea to deliver the first 50 basis point rate rise in its history.
South Korea’s consumer prices rose 6 per cent in June from a year earlier, the fastest rate since November 1998 and up from a 5.4 per cent increase in May.
Last August, South Korea became the first big Asian economy to raise interest rates since the start of the coronavirus pandemic, when the central bank increased the seven-day repurchase rate by 25 basis points from a record low of 0.50 per cent.
The Bank of Korea has delivered five quarter-point rate rises since then, bringing its benchmark rate to 1.75 per cent, the highest level in three years.
Its latest rate decision, due next week, will be watched with interest in other parts of Asia.
Australia’s central bank on Tuesday raised rates for the third successive month, announcing an increase of 50 basis points to 1.35 per cent. The Reserve Bank of Australia has warned that inflation, which is already running at a 21-year high, could hit 7 per cent by the end of the year.
In Japan, central bank governor Haruhiko Kuroda’s decades-long ultra-loose monetary policy has faced intense scrutiny under the pressure of global inflation.
Responding to Tuesday’s inflation figures, Lee Hwan-seok, Bank of Korea deputy governor, forecast that the inflation trend would continue and stressed that the bank “needs to be particularly vigilant against further strengthening of inflationary expectations”.
Employees in the public and private sectors are also seeking higher wages. Workers demanding pay increases from Hyundai Motor Company, one of the country’s largest businesses, voted last week to strike.
South Korea decided last week to raise the minimum wage next year by 5 per cent and to increase household gas and electricity prices this month.
The weakness of the Korean won will also be an important factor in the BoK’s rate decision. The currency depreciated 6.7 per cent against the dollar in the second quarter of 2022 to become the worst-performing in Asia after the yen, driving up the price of imports.
Some analysts have predicted that the BoK would remain cautious about raising interest rates too fast, given the country’s record-high household debt and slowing export growth. South Korea’s exports in June reported their slowest growth in 19 months, raising concern about the economic outlook.
But others have argued that the BoK would seek to keep pace with the US Federal Reserve, which is considering another large rate rise this month after delivering a 75-basis point rate increase in June.
Analysts from Nomura Holdings warned this week that big economies, including South Korea, risked entering recession over the next year owing to higher living costs and policy tightening.
Additional reporting by Nic Fildes in Sydney