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Bank of Korea hikes key interest rate to 1.25% Updated: 2022-01-14 17:01:24 KST

A closely watched monetary policy meeting in South Korea did not buck market expectations.
Further pushing up its key interest rate on Friday, the Bank of Korea brought the rate back to pre-pandemic levels.
The interest rate is now set at 1.2-5 percent, up 25 basis points from the previous figure.
The rate raise comes only two months after the central bank hiked its key interest rate to 1-percent.

"The domestic economy is still on the recovery track despite the resurgence of COVID-19. While consumption and facility investment stagnated temporarily due to global supply shortages, the economy is expected to extend its growth based on solid exports and a continuous recovery in consumption."

This seemingly hawkish move however had been widely expected among pundits amid growing inflationary pressure.
In fact, the BOK Governor Lee Ju-yeol added that the hike was not large and that it is still within the range of monetary easing.
Consumer price inflation has been staying above three percent on-year during the previous three months, far higher than the central bank's target of 2 percent.
Such a trend is expected to continue throughout this year, possibly calling for more rate hikes.

Pundits also assume that the global trend of tightening monetary policies influenced the decision.
The Federal Reserve strongly hinted at least three rate hikes this year with some expecting four rate rises.
And such policy change by the world's biggest economy often leaves countries like South Korea to follow the trend, to prevent the rapid outflow of capital.

"Well if the United States raises its interest rates but Korea does not then the United States not only is a safer investment for international investors, it also has, it also may have higher returns so it's natural that capital flows from Korea to the United States.

Friday's rate increase however comes amid lingering economic uncertainties, stemming from the fast-spreading Omicron variant.
Though the country is on a recovery track, some think that the hike could disrupt the still fragile recovery trend.
The Bank of Korea says, a point-2-5 percent rate hike means additional annual interest payments of 2.7 billion U.S. dollars.
It also projected on Friday a 3 percent GDP growth this year, the same as the previous forecast made in November, based on robust exports and a rebound in consumer sentiment.
Kim Sung-min, Arirang News.
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