SEOUL, Mar. 23 (Korea Bizwire) — Major foreign investment banks (IBs) have forecast South Korea’s central bank to hike interest rates once this year due to the fallout from growing protectionism and a slowdown in job creation, a report said Friday.
The projection runs counter to views by some market watchers that the Bank of Korea (BOK) will likely jack up the benchmark base rate twice this year — one in the first half and the other in the latter half — owing to the rate difference at home and abroad.
The U.S. Fed on Wednesday raised the federal funds rate from 1.5 percent to 1.75 percent, the highest level since the 2008 financial crisis amid a solid U.S. economy. The BOK has kept its policy rate at 1.5 percent since November after raising it from 1.25 percent.
According to the report by the Korea Center for International Finance, Societe Generale said the BOK will have to confirm improvements in major economic indicators before a rate hike, such as the first-quarter growth rate and consumer inflation in March and April.
Last month, South Korea’s consumer prices increased 1.4 percent from a year earlier, compared with a 1 percent gain in the previous month.
Societe Generale attributed the faster pace of consumer inflation in February to temporary factors, such as a jump in fresh food.
Goldman Sachs has also forecast BOK’s one rate rise this year, citing tamed consumer inflation in Asia’s fourth-largest economy.
Goldman Sachs said South Korea’s demand-pull inflationary pressure remains limited, given a slowdown in employment growth in the service sector closely related to consumption, and the low capacity utilization rate of the manufacturing sector.
The investment bank projected South Korea’s full-year consumer inflation to undershoot the central bank’s target of 1.7 percent.
Those foreign IBs have also cited sluggish job creation in such key industrial sectors as automaking and shipbuilding.
Japanese investment bank Nomura, however, has projected the BOK to hike its key rate twice this year due to strong exports and increasing inflationary pressure from a rise in the minimum wage.
Meanwhile, foreign IBs have projected South Korea’s exports, one of its growth engines, to expand moderately this year on the back of a resilient global economy.
Citi has forecast South Korea’s overseas shipments to climb 7.5 percent in March from a year earlier amid brisk overseas demand and rising chip prices.
In February, South Korea’s exports gained 3.9 percent on-year, with their growth slowing mainly due to fewer working days caused by the Lunar New Year holiday.