By Kwanwoo Jun
SEOUL--South Korea on Thursday became the first major Asian economy to raise its main policy rate since the Federal Reserve started increasing U.S. rates two years ago, the latest sign of a global move away from crisis-era stimulus measures.
The Bank of Korea increased rates for the first time in more than six years in response to faster-than-expected growth this year and an uptick in inflation as a strengthening U.S. economy, a recovery in Europe and unexpected resilience in Chinese growth drive a synchronized global expansion.
The widely expected rate increase came just a day after North Korea's latest missile provocation left Asian markets largely unruffled, indicating little need for the central bank to delay a move that will likely herald a wave of similar decisions across Asia.
Of 17 market analysts surveyed by The Wall Street Journal ahead of the decision, 14 said they expected the bank to raise the base rate by a quarter percentage point to 1.5% at the latest policy meeting. They cited the country's fastest expansion in over seven years in the third quarter as a factor calling for less support for the economy as brisk exports powered by a smartphone-driven tech boom and increased government spending fuel growth.
Samsung Electronics Co. is a key player in the world's tech-supply chain, manufacturing smartphones, memory chips and display panels for its own Galaxy models and also for Apple Inc.'s iPhones.
Seoul's left-leaning government, meanwhile, has ramped up fiscal stimulus to boost welfare spending and create more public jobs since it came to power in May.
Goldman Sachs said in a recent report that a wave of rate increases starting in South Korea would likely spread across Asia to Malaysia and Taiwan next year, and Thailand in 2019, as those emerging economies enjoy robust growth, inflationary pressure and the impact of further U.S. rate increases.
Major global central banks in advanced economies have recently been in a tightening mode. The Fed has raised rates twice this year, with another increase expected in December. The Bank of Canada raised rates in back-to-back meetings this summer and the Bank of England raised rates in November for the first time in a decade. The European Central Bank is set to dial back its bond-buying program in January.
Seoul's policy makers expect economic growth this year to top even their latest 3% forecast. The Organization for Economic Cooperation and Development Wednesday raised its growth estimate for Korea to 3.2% this year.
The International Monetary Fund also upgraded its view to 3.2% earlier in November. The IMF also said that monetary conditions would still support growth even if interest rates were raised a few times.
Still, the central bank is expected to proceed only gradually with rate increases. While consumer inflation is hovering around the central bank's 2% target, up from an average of 1% in 2016, it shows few signs of pushing sharply higher.
Some South Korean policy makers and analysts also point out that while the country's export-focused sector is in rude health, the economy at large is not consistently stronger with private consumption continuing to show signs of softness. That patchiness is also seen in other economies in the region.
The won's steep gains against the U.S. dollar could also potentially undermine South Korean exports, while high levels of household debt are weighing on spending. Korea's currency has gained around 11% against the dollar so far this year with about half the gains coming in the last six weeks as investors priced in a likely rate increase.
Write to Kwanwoo Jun at [email protected]