South Korea’s economy accelerates unexpectedly, pointing to further rate hikes

Pedestrians cross a road outside the Bank of Korea headquarters in Seoul on July 13, 2022. South Korea’s economic growth unexpectedly accelerated in the second quarter as strong consumption linked to the easing of Covid-19 restrictions offsetting weak exports, which argues for a further central rise in bank interest rates.

Jung Yeon-i | AFP | Getty Images

South Korea’s economic growth unexpectedly accelerated in the second quarter, with strong consumption linked to the easing of Covid-19 restrictions offsetting weak exports, arguing for further interest rate hikes of the central bank.

The Bank of Korea estimated on Tuesday that gross domestic product for the April-June period grew 0.7% quarter-on-quarter, faster than the 0.6% growth in the first quarter and above a rise 0.4% announced in a Reuters survey.

Economists said the upbeat data allowed the central bank, which this month carried out an unprecedented rate hike of 50 basis points, to continue to tighten policy in the months ahead.

“The economy will inevitably slow due to prolonged inflation and slowing exports, but today’s strong numbers are a good boost for the central bank which sees inflation as the main risk to the economy. ‘instant,” said Chun Kyu-yeon, an economist at Hana Financial Investment.

The BOK raised the key interest rate by a combined 1.75 percentage points to 2.25% from the record high of 0.5% since August last year, with economists predicting rates will be at 2 .75% by the end of this year. The bank holds its next policy meeting on August 25.

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Private consumption jumped 3.0%, the best in a year, after falling 0.5% in the first quarter as the government scrapped almost all Covid-19 social distancing restrictions in April.

The strong consumption comes despite the BOK’s aggressive series of interest rate hikes since August last year.

The economy was also boosted by increased government spending after parliament approved a 62 trillion won ($47.33 billion) supplementary budget weeks after President Yoon Suk- yeol early May.

However, exports and business spending on production facilities slumped amid a slowing Chinese economy and fallout from a war in Ukraine as well as a global wave of monetary policy tightening to fight against inflation.

Exports fell 3.1% in the April-June period from the previous quarter, the biggest drop in two years. Capital investment fell for a fourth consecutive quarter by 1.0% after contracting 3.9% in the January-March period.

Asia’s fourth-largest economy grew 2.9% in the second quarter year-on-year, faster than analysts’ expectations for 2.5% growth but slower than the 3.0% growth in first trimester.

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