Asia report: Most markets fall as Bank of Korea hikes rates

Stock markets in Asia closed mostly lower on Thursday, as South Korea’s central bank announced its second consecutive interest rate hike, adding 25 basis points to its base rate.

In Japan, the Nikkei 225 was down 0.27% at 26,604.84, as the yen strengthened 0.46% on the dollar to last trade at JPT 126.73.

Robotics specialist Fanuc was down 2.18%, while among the benchmark’s other major components, Uniqlo owner Fast Retailing was up 0.4% and tech investing giant SoftBank Group added 1.22%.

The broader Topix index eked out gains of 0.05% by the end of trading in Tokyo to close at 1,877.58.

On the mainland, the Shanghai Composite was 0.5% firmer at 3,123.11, and the smaller, technology-centric Shenzhen Composite was 0.57% higher at 11,206.82.

South Korea’s Kospi slipped 0.18% to 2,612.45, while the Hang Seng Index in Hong Kong lost 0.27% to 20,116.20.

Seoul’s blue-chip technology stocks were on the back foot, with Samsung Electronics down 0.75%, and SK Hynix tumbling 4.63%.

The Bank of Korea announced its second interest rate hike in a row during the session, taking its base rate 25 basis points higher to 1.75%.

It also adjusted its forecasts, with the central bank now expecting inflation of 4.5% this year, up from 3.1% in February, while growth was downgraded to 2.7% from a previous 3.0% estimate.

“Growth is expected to remain supported thanks to a post-Covid rebound in private consumption, even as exports slow on the back of deteriorating global growth, and capex faces supply constraints,” said Craig Botham at Pantheon Macroeconomics.

“Inflation is seen as being driven by demand and supply factors, with a sharp rise in service prices adding to the pressure from the global energy shock, and consumer inflation expectations on the increase.

“Won weakness, linked to Fed tightening, was also flagged, suggesting a need to hike to limit the pressure on the currency.”

Botham noted that the Bank of Korea’s new governor Rhee Chang-yong emphasised the need to focus on inflation in his comments, sounding “more hawkish” than his predecessor by arguing that higher inflation would cause bigger problems for the economy than higher rates.

“Further hikes seem guaranteed, given the inflation outlook and emphasis, but should be tempered if the Fed hikes less than expected, which we increasingly suspect will be the case.

“Governor Rhee wants to get real rates back to neutral territory, and expects inflation to still be over 3% in early 2023, implying scope for the policy rate to at least breach 3% itself.

“We still think the BoK is too sanguine about the risk to growth, raising the risks of a policy mistake.”

Sentiment in the region was given a boost by trading on Wall Street overnight, where equities rose on the back of the minutes from the Federal Reserve’s May Meeting.

The minutes showed policymakers were looking to make several 50-basis point rate hikes in the coming months in a bid to move “expeditiously” towards neutral.

Officials did, however, leave the door open for a pause in rate hikes later in the year, with some saying it looked like inflationary pressures may have already peaked.

Oil prices were higher as the region went to bed, with Brent crude last up 0.79% on ICE at $114.93 per barrel, while the NYMEX quote for West Texas Intermediate rose 0.96% to $111.39.

In Australia, the S&P/ASX 200 was off 0.69% at 7,105.90, while across the Tasman Sea, New Zealand’s S&P/NZX 50 was 0.63% lower at 11,102.84.

The down under dollars were in a mixed state against the greenback, with the Aussie last 0.01% weaker at 70.9 US cents, while the Kiwi strengthened 0.06% to 64.8 cents.

Reporting by Josh White at Sharecast.com.