BOK likely to raise key rate this month

By Kim Jae-kyoung

The nation’s central bank is expected to raise its key rate at the November monetary policy committee meeting Tuesday, with concerns over currencies easing after leaders of the G20 agreed to avoid a devaluation race over the weekend.

Despite a build-up in inflationary pressure here, the Bank of Korea (BOK) froze the benchmark interest rate in October for the third consecutive month due to rapid strengthening of the local currency against the dollar amid lingering uncertainties surrounding the global economic recovery.

However, the G20 agreements are expected to give more leeway for the central bank to tighten its monetary policy, as the accords are likely to clear away uncertainties created by the volatility of currencies ― at least for now. In the joint statement, the leaders promised to refrain from any competitive devaluation of currencies.

Now the tallest task for the BOK is to curb inflation. Consumer prices soared 4.1 percent in October year-on-year, above the central bank’s upper inflation target of 4 percent.

Producer prices grew 5 percent in the same month, the fastest growth in nearly two years. Prices for imported goods also jumped 8.1 percent, the highest in five months. Given that import and producer prices translate into consumer prices in two or three months, inflationary pressure is likely to build up further in the coming months.

At a press conference at the Coex Thursday, BOK Governor Kim Choong-soo said that consumer inflation was expected to reach 3 percent this year, well above its earlier projection of 2.8 percent. He forecast consumer inflation to rise to 3.5 percent next year.

According to a survey by the Korea Financial Investment Association (KOFIA) on 167 bond market experts, 71.9 percent expect the BOK to hike the key rate this month. KOFIA said that analysts were predicting rate hikes mainly because consumer prices surged 4.1 percent in October.

In particular, there are growing calls for the rate increase after the U.S. announced a $600 billion-U.S.-dollar quantitative easing decision to purchase treasury bonds, which many believe will form another bubble in the local asset market.

A rate hike has many drawbacks on the economy as it can strengthen the won’s value by attracting more foreign capital, hurting local exporters’ price competitiveness. But these concerns may ease once the government unveils its measures against excess capital flows.

“With the G20 summit ending with a currency truce, the central bank is likely to place top priority on curbing inflation. Since there are still lingering uncertainties, chances are that it will take a baby step toward further tightening by making a 25 basis point hike,” a Seoul analyst said.

The central bank has left its policy rate untouched at 2.25 percent since it raised the rate by 25 basis points in July for the first time in 23 months.

kjk@koreatimes.co.kr