Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
BOK feels increasing pressure to raise rate amid undying inflation
By Yi Whan-woo
By Yi Whan-woo
The Bank of Korea (BOK) is being pressed to increase its policy rate again next week, as inflation here may possibly be rising again since January after cooling down in November and December.
The BOK may not be able to take a breather in its rate policy at its upcoming monetary policy board meeting, also due to a slower-than-expected decline in U.S. inflation last month, which in turn could prompt the U.S. Federal Reserve to hasten its rate hikes to better squeeze inflation.
Accelerating hikes in the Fed's rate could be possible, as U.S. job growth is robust and it suggests the world's largest economy can withstand an even sharper rise.
But for Korea, a steeper increase in the U.S. benchmark interest rate is not welcomed as it will widen the already-reversed Korea-U.S. interest rate gap and push foreign investors to take their money elsewhere in search for safe haven assets.
“The BOK is projected to deliver back-to-back 25-basis-point rate hikes this month as upward inflationary pressure appears to be growing again,” Daishin Securities researcher Lee Da-eun said, Friday.
The BOK's upcoming rate-setting meeting is scheduled on Feb. 23, following the previous meeting on Jan. 13 when the base rate was lifted by a quarter percentage point to a more-than-10-year high of 3.5 percent.
The BOK was anticipated to freeze the rate at 3.5 percent because inflation was on a downward course in November and December, although it remained above 5 percent.
Such a downward inflation curve was in line with the BOK's projection that inflation will be lowered eventually to the 2023 target range of 3 percent.
Consumer prices then bounced back for the first time in three months in January by 5.2 percent due to a surge in heating costs.
Under the circumstances, electricity prices were hiked by a four-decade-high of 9.5 percent in January while gas prices are planned to be raised beginning in April.
The upward inflationary pressure is likely to get tenser as Seoul and other major municipalities plan to increase public transportation fares in the second half of the year.
The fare hikes were initially scheduled to take effect in spring but were delayed following the central government's urgent request last week to lessen the burden on people's livelihood.
Concerning inflationary pressure outside Korea, LG Economic Research Institute economist Cho Young-moo said U.S. inflation in January leaves the Fed open to a more hawkish rate policy after its most aggressive round of rate hikes in 40 years.
The Fed slowed the pace of its interest rate hikes to 25 basis points in its latest rate-setting on Feb. 1, as compared to a flurry of 50- and 75-point hikes throughout 2022.
While U.S. inflation slowed down for the sixth month straight to 6.4 percent in January, the rate was higher than expected and that means the Fed may go for lifting the benchmark rate above 5 percent.
The U.S. benchmark interest rate is currently in a range of 4.5 percent to 4.75 percent, outpacing Korea's 3.5 percent by up to 1.25 percentage points.
“I would say the reversal in the Korea-U.S. interest gap should not exceed 1.5 percent, and it is worrisome that such a gap will widen if the BOK freezes the rate at the current level,” Cho said.