From Zacks: South Korea’s central bank raised interest rates for the first time in more than six years. Economic fundamentals have been strong, with increased exports contributing to GDP growth.
Exports constitute over 40% of South Korea’s GDP (read: What Lies Ahead for South Korea ETFs?).
The Monetary Policy Board decided to increase the benchmark interest rate by 25 basis points to 1.5% from a historic low of 1.25%. This was in line with a Reuters poll, with18 out of 21 economists expecting a rate hike in the recent monetary policy meeting.
The central bank of South Korea faced increased pressure to hike rates after the Federal Reserve went on a policy tightening mode. This is the first major central bank in Asia to have hiked rates since 2014. The central bank governor stated that GDP growth and inflation in the near future will be in check to assess the need for further changes in monetary policy.
Economic Scenario
South Korea’s GDP grew 1.4% sequentially in the July-August period, marking the fastest growth rate since the second quarter of 2010. It grew 3.6% annually compared with 2.7% in the June quarter and surpassed expectations of a 3% increase.
On a year-over-year basis, consumer prices in South Korea increased 1.8% in October compared with 2.1% in September. However, the labor market seems to be weak and might hold the central bank back from tightening policy further.
Risks Involved
Although strong exports bolstered GDP growth, South Korea has been witnessing a sharp drop in Chinese tourists. This is primarily because of increased tensions between the United States and China, as deployment of a U.S. missile defense system in South Korea was not welcomed by China.
Latest reports claim that this issue has been somewhat alleviated with reduced tensions between the two countries. China partly removed the ban on group travels to South Korea, while keeping the online curbs in place.
The South Korean economy is also privy to prevailing geopolitical risks. North Korea has been continuously testing missiles to develop a nuclear program in order to safeguard itself from potential U.S. invasion, per North Korean leader Kim Jong-Un. Earlier this week, North Korea launched a Hwasong-15 missile with improved technology that can put the entire United States in range, per Korean Central News Agency (KCNA).
North Korean leader Kim Jong-Un made claims of his regime completing its nuclear program, as it broke its two-month-long period of silence by testing a missile that reached an altitude of more than 4,000 kilometers and traveled a distance of 1,000 kilometers before dropping in the Sea of Japan.