South Korea’s central bank said on Thursday it was better for long-term growth to stabilise prices quickly as it gave insight into its decision for an unusually large rate hike in July in its quarterly monetary policy report.
As part of an explanation for the move, it said fast and large rate hikes were needed for now and that the dollar-won exchange rate had also been a factor.
“Once high inflation is permanently set in place, it would require much stronger monetary policy responses, so for now, it is necessary to raise interest rates fast and by a large margin to suppress inflation expectations in a preemptive manner,” the central bank said in the report.
“Short-term growth loss is inevitable in the process of responding to high inflation, and based on past experiences, there is more benefit to stabilise prices quickly for growth in the long-run.”
The BOK has raised its policy rate by a total of two percentage points to 2.50% since August last year as it tries to tame inflation, which is running near 24-year highs, with the last move a 25 basis point rate increase in August.
It delivered an unprecedented 50-basis-point hike in July – the first and only such move since the BOK adopted the current policy framework in 1999.
Rhee Chang-yong, governor of the Bank of Korea, said at the time his bank would try not to raise interest rates by a bigger margin than the usual 25 basis points when it needs to tighten monetary policy again.
The central bank has said it sees inflation staying at high levels for a longer-than-expected period, as consumer demand remains robust and uncertainty remains high on the supply side after Russia halted gas supplies to Europe.
The BOK said the dollar-won exchange rate was also a factor behind its rare 50-bp rate hike in July, as global peers sped up their tightening cycles.
“As the U.S. Federal Reserve’s monetary tightening pace accelerates, it is putting additional inflation pressure in other countries via higher exchange rates,” the BOK said in the report.
A sharp fall in the South Korean won against dollar in the first half of this year has pushed domestic consumer prices up by 0.4 percentage points, the central bank added. The won fell 8.4% against the dollar over that period.