Asia report: Markets lower as Bank of Korea hikes rates

Most markets in Asia were in the red at the close on Thursday, as the Bank of Korea became the first central bank of a developed economy to raise interest rates in the wake of the Covid-19 pandemic.

In Japan, the Nikkei 225 was the region’s odd one out, managing gains of 0.06% to 27,742.29, as the yen weakened 0.09% against the dollar to last trade at JPY 110.12.

Uniqlo owner Fast Retailing was up 0.16%, while among the benchmark’s other major components, robotics specialist Fanuc lost 1.64% and technology giant SoftBank Group was 0.1% lower.

The broader Topix index was 0.02% weaker by the end of trading in Tokyo, closing at 1,935.35.

On the mainland, the Shanghai Composite lost 1.09% to 3,501.66, and the smaller, technology-centric Shenzhen Composite slid 1.53% to 2,437.15.

South Korea’s Kospi was off 0.58% at 3,128.53, while the Hang Seng Index in Hong Kong was down 1.08% at 25,415.69.

Seoul’s blue-chip technology stocks were mixed, with Samsung Electronics down 1.45%, while SK Hynix rose 0.48%.

The Bank of Korea hiked interest rates for the first time in almost three years during the day, raising its benchmark rate by 25 basis points to 0.75%.

That move made Korea the first developed economy to raise interest rates in the Covid-19 pandemic era.

Bank governor Lee Ju-yeol said the decision was not unanimous among members of the board, with a dissenting member calling for rates to be held where they were.

Markets were also divided on the issue, with just 16 of the 30 analysts polled by Reuters anticipating the bank to raise rates.

“It’s been clear to us that meetings would be live at this stage since late last year, when we pencilled in a hike for this point, though in the event we thought still high domestic cases might stay the hand,” said Pantheon Macroeconomics chief Asia economist Freya Beamish.

“The BoK argued in the statement that exports and facilities investment are holding up, and suggested that is enough, admitting that private consumption has slowed somewhat, due to the resurgence of Covid.

“Admittedly, 20-day figures were buoyed in August by an unsustainable surge in exports to China, but the overall trend has been robust, and has outperformed China and Japan.”

Beamish said that, alongside the global chip shortage, GDP growth should keep “reasonable”, with the Bank of Korea still seeing growth of 4% this year, in line with the May forecast.

The Bank raised its inflation forecast to the “lower-2%” level, from the May forecast of 1.8%, with core inflation forecast to run at the “lower-1%” level.

“[Governor] Lee suggested in the press conference that the economy is already operating under demand-side inflationary pressure,” Beamish said.

“The decision serves as a concrete reminder that financial imbalances have worsened in this part of the world, since the Global Financial Crisis, forcing policymakers to put them first.

“The statement noted acceleration in household loan growth, and the rapid increase in housing prices.”

Those would continue to be drivers for the Bank of Korea, Freya Beamish added.

Oil prices were lower as the region went to bed, with Brent crude last down 0.84% at $71.64 per barrel, and West Texas Intermediate losing 0.94% to $67.72.

In Australia, the S&P/ASX 200 was 0.54% weaker at 7,491.20, while across the Tasman Sea, New Zealand’s S&P/NZX 50 lost 0.93% to 13,051.62.

The down under dollars were both weaker against the greenback, with the Aussie last off 0.23% at AUD 1.3774, and the Kiwi retreating 0.25% to NZD 1.4375.