Bank of Korea Seen Turning Hawkish in Second Half as Inflation Surges

BOK Sends Repeated Hawkish Signals

Market Prices In One to Two Rate Hikes This Year

The Bank of Korea is increasingly expected to shift to a tighter policy stance in the second half of the year as the prolonged war in the Middle East pushes up prices. The economy remains resilient, as shown by first-quarter growth of 1.7%, while inflation continues to run high. Markets are betting the BOK will raise its benchmark interest rate once or twice before year-end.

Senior Deputy Governor Rhee Sang-dai said at an inflation review meeting on May 6 that consumer-price growth is expected to accelerate further this month. That suggests inflation could climb from the upper-2% range into the 3% range. Consumer prices rose 2.6% in April, the fastest pace in one year and nine months.

The BOK said inflation is likely to remain elevated this month as oil prices stay high and the sharp drop in agricultural, livestock and fisheries prices in May last year creates a base effect. Uncertainty over the inflation path remains high, Rhee said, citing developments in the Middle East, the direction of oil prices and the possibility that price pressures could spread beyond petroleum products. The central bank will closely monitor inflation risks, he added.

Rhee, an ex officio member of the Monetary Policy Board, said on May 3 that it was time to consider a rate increase, an unusual remark that markets interpreted as a signal the BOK is preparing to put a hike on the table. His comments on May 6 reinforced that view. Investors are now looking to the dot plot and policy statement due at the Monetary Policy Board's May 28 meeting for a clearer hawkish tilt. Rhee said the distribution of the May dot plot could move higher. In February, only one of 21 dots pointed to a rate increase.

The stronger-than-expected first-quarter growth figure appears to have reduced the BOK's concern about an economic slowdown and given it more room to focus on price stability. Cho Yong-gu, an analyst at Shinyoung Securities, said a majority of dots in the May plot would likely point to 2.75%, 25 basis points above the current 2.5% benchmark rate. That would increase the odds of a rate hike at the August Monetary Policy Board meeting.

Shim Seong-mi, Korea Economic Daily reporter smshim@hankyung.com