Decade-high inflation presses BOK for rate hike despite chief's absence

Bank of Korea (BOK) governor nominee Rhee Chang-yong responds to reporters as he heads to a meeting in Seoul, April 1, to prepare for a parliamentary hearing scheduled on April 19. The BOK will hold its rate-setting meeting for the first time without the governor being officially appointed yet, Thursday. Yonhap

By Yi Whan-woo

The Bank of Korea (BOK) is under increasing pressure to raise the benchmark key interest rate this week despite the current BOK chief position being vacant, as inflation is not likely to let up after topping 4 percent for the first time in more than 10 years.

The more hawkish U.S. monetary policy is also putting the BOK in a tight spot, amid speculation that the interest gap between Korea and the U.S. may be reversed in the coming months, thereby prompting an outflow of foreign capital.

The BOK will hold its rate-setting meeting, Thursday, with its governor nominee, Rhee Chang-yong, awaiting a National Assembly hearing before taking office, after the term of former BOK chief Lee Ju-yeol ended on March 31. Rhee's hearing is scheduled for April 19.

The transition period will mark the first time for the central bank to go ahead with the meeting without its governor. The decision on what to do with the rate will be made by the remaining members of the rate-setting board.

“Under the circumstances, the BOK is anticipated to increase the benchmark interest rate by 0.25 percent,” said Nomura Securities economist Park Jeong-woo.

He said that such an increase would be possible in order to cope with rising inflation, as well as to be consistent with the incoming administration of President-elect Yoon Suk-yeol, a key priority of which is to stabilize prices.

“The BOK may make a preemptive move concerning the interest rate as an act of cooperation with the next government,” Park explained.

Meritz Securities analyst Yoon Yeo-sam voiced a similar view.

“In the political circle, the rising inflation is a very sensitive issue. The central banks of the U.S. and other major economies are mulling over the tightening of monetary policy,” he said.

Concerning the interest rates of Korea and the U.S., that of the former has remained at 1.25 percent since February, while that of the latter was increased by 25 basis points in March and is now in the range between 0.25 percent and 0.5 percent.

This gap in the interest rates of the two countries, however, might soon be reversed, considering that the Federal Reserve is committed to fighting U.S. inflation through a higher interest rate ― possibly 50 basis points in the most extreme case ― in its six remaining rate-setting meetings this year, including May.

The BOK governor nominee has been open to the possibility of such a reversal or of the interest gap narrowing, saying, “It might result in the depreciation of the won and bring an impact on consumer prices here, although the situation does not mean immediate capital flight.”

Meanwhile, an economist disagreed with the need for the rate hike, arguing that the uncertainties associated with vacancy of the BOK chief position are bigger than those connected to the Ukraine crisis and other global economic risks. The soaring inflation is being attributed to these geopolitical and global economic uncertainties.

“It is not even certain to what extent the hike will help in tackling inflation, but it is certain the hike will be a burden to revitalizing the economy,” Cho Young-moo, a researcher at LG Economic Research Institute, said.

Consumer prices have been rising for months, surpassing the figure of 3.1 percent projected by the BOK and growing to 4.1 percent in March, according to Statistics Korea last week.