By Ambar Warrick
Investing.com-- The South Korean central bank raised rates within market expectations on Wednesday, as it looks to combat rising inflation and help support a severely weakened won.
The Bank of Korea (BoK) hiked interest rates by 50 basis points (bps) to 3%, bringing lending rates to their highest level in a decade. The move comes as the country grapples with inflation reaching a roughly 24-year high this year, which has weighed heavily on Asia’s fourth-largest economy.
Wednesday’s hike is the BoK’s sixth rate hike this year. The central bank was among the first in the world to begin tightening policy in the aftermath of the COVID pandemic, with its latest hiking cycle beginning in August 2021. But this has done little to temper rising inflation.
South Korea’s economy is also reeling from the knock-on effects of a drastic economic slowdown in China, which is a major trading partner. Higher commodity prices have also weighed heavily on the country, given its heavy dependence on food and fuel imports.
While inflation eased slightly in October, it did little to reduce the BoK’s hawkish bias. The bank recently signaled that it expects inflation to remain elevated in the near-term, trending around 5% by the first quarter of 2023.
The bank is also moving up interest rates to keep pace with the Federal Reserve, which hiked rates five times this year.
But with U.S. interest rates currently trending above those in South Korea, the won has suffered this year. The currency tumbled over 20% to a 13-year low, and is among the worst-performing Asian units this year.
The won showed little reaction to the rate hike, trading down slightly at 1,432.33 to the dollar.
Wednesday’s rate hike also disappointed a small portion of traders betting that pressure from the Fed would push the BoK into raising rates more than expected.