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Bank of Korea returns to smaller rate hikes, lowers growth outlook

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(Bloomberg) — The Bank of Korea returned to its usual pace of policy tightening to ease pressure on the economy and debt markets while keeping inflation under control.

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The central bank raised its seven-day buyback rate by a quarter of a percentage point to 3.25% on Thursday, according to a decision supported by 15 of 17 economists surveyed by Bloomberg. The other two predict growth of half a point.

The BOK now sees the economy growing at a slower pace of 1.7% next year, with slower global growth and downward revisions likely to impact interest rate hikes as factors. In August, the bank forecast an expansion of 2.1%.

The resumption of small interest rate hikes reflects concerns among policymakers about the credit crunch caused by the default of local government-backed developers. The BOK is also concerned that at a time when exports are falling for the already trade-dependent nation, a further increase could unduly suppress economic growth.

The BOK raised interest rates by two half points this year to keep pace with the Federal Reserve and prevent the depreciation of the local currency. Signs of a potential slowdown in the pace of US Fed tightening have given the BOK breathing room after strengthening past 13-year lows in recent weeks.

Inflation remains a major concern for the Korean central bank, having reached 5.7% in October. Policymakers expect consumer price growth to remain high at around 5% for some time to come, although they do not expect it to rise much further.

The inflationary battle has had an impact on the Korean housing market, with higher borrowing costs putting pressure on property prices and debt. Korean household debt grew at an all-time slow in the past quarter, as mortgage-backed loans eased lending.

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Nevertheless, the BOK now sees inflation next year at 3.6%, weaker than forecast in August.

Following the announcement by the BOK of its latest forecasts for economic growth and inflation in 2023, Governor Ri Chang-yong will reveal at a press conference starting after 11 a.m. in Seoul whether there was any disagreement over the latest decision.

Market participants will be interested to know if any member of the board has asked for a half point increase or even a break. Ri may also hint at whether the BOK will continue its usual pace of tightening early next year and what he sees as the potential level of closing interest rates.

(adds details to forecasts)

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