South Korea central bank warns against inflation, leaves door open for Jan hike

[SEOUL] The chief of South Korea's central bank sees the increasing threat of inflation taking hold in Asia's fourth largest economy, he said on Thursday (Dec 16), leaving the door open for an interest rate hike as early as January.

The central bank's board needs more time to properly assess the economic impact of the latest social distancing curbs, but there is no change in plans to gradually normalise monetary policy, Governor Lee Ju-yeol said.

"We still see inflation at 2 per cent for next year, but upside risks seem bigger, hence we described our outlook as 2 per cent-range," Lee told a news conference after releasing a bi-annual report on inflation.

"Basically I made it clear that monetary policies will be normalised and there's no change to that plan," Lee said, when asked if the benchmark rate could be raised at the bank's next review meeting on Jan 14.

Last month, the Bank of Korea raised its inflation outlook for next year to 2 per cent from 1.5 per cent earlier, as it raised interest rates for the second time since the beginning of the pandemic, to rein in price pressure.

Lee has previously said another rate hike is possible in the first quarter of next year as the bank keeps up its withdrawal of massive monetary stimulus adopted when the pandemic hit activity last year.

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Thursday's report stressed that inflation is likely to stay above its 2 per cent target for some time, amid a solid economic recovery and growing price pressure from global supply bottlenecks.

Consumer inflation accelerated to a decade-high of 3.7 per cent in November from a year earlier, while core CPI, which excludes volatile food and fuel, rose to 1.9 per cent.

On Thursday, South Korea said it would reinstate tougher social distancing rules to tackle rising new infections and serious cases, after it eased the curbs 1-1/2 months ago in a "living with Covid-19" policy.

REUTERS