SEOUL, May 28 (AJP) - Having held its benchmark rate unchanged at 2.50 percent for a full year, the Bank of Korea on Thursday signaled a clear shift to tightening by flagging the probability of as many as three hikes to 3.25 percent depending on the path of inflation.
New Governor Shin Hyun-song presiding his first rate meeting and media briefing, could not have been blunter about the direction ahead.
"All the signs — price pressure, the growth trajectory, the exchange rate and the real estate market — point in one clear direction," Shin said, adding that the case for the rate path was so "exceptional" that there could be no conflict in policymaking.
"The BOK will manage all the factors feeding into prices by raising the base rate," he said.
According to the central bank's updated six-month rate outlook, or "dot plot," released after the Monetary Policy Board meeting, 10 of the 21 projected policy-rate dots submitted by the seven board members pointed to a benchmark rate of 3.00 percent within six months. Seven projected 2.75 percent, two indicated 3.25 percent, and only two suggested rates would remain at 2.50 percent.
The distribution implies the board's strongest consensus now leans toward two additional quarter-point hikes — 50 basis points in total — over the next six months.
The smaller cluster at 3.25 percent suggests some policymakers see room for a third hike should inflation and financial imbalances worsen.
The latest projections marked a dramatic reversal from February, when 16 of the 21 dots pointed to rates staying unchanged at 2.50 percent and four suggested a cut to 2.25 percent.
The clearest signal yet of a shift in monetary policy was enough to shake capital markets that had been fixated on the chip rally.
Bond yields jumped on the clear indication of a hike. The three-year yield rose 4.1 basis points to 3.752 percent and the 10-year climbed 2.9 basis points to 4.131 percent by midday.
The stock market tumbled, with the KOSPI retreating 1.4 percent and the KOSDAQ 3.7 percent. The won slipped 4.8 won to 1,506.80 against the U.S. dollar.
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