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 raises key rate to highest level in 3 years to fight inflation
By Yi Whan-woo
Central bank hints at additional rate hikes this year, while vowing to handle growth, inflation in balanced manner
By Yi Whan-woo
The Bank of Korea (BOK) raised its key interest rate, Thursday, by 25 basis points to 1.50 percent, the highest level since July 2019, in a desperate bid to curb inflation as well as a possible capital flight following the U.S. Federal Reserve's faster-than-expected tapering.
The decision, which was made in the absence of a BOK governor, came as inflationary pressure mounts quickly with consumer prices rising at the fastest pace in over a decade amid skyrocketing energy and commodity prices triggered by a prolonged Russia-Ukraine war.
“We judged that inflationary pressure can last longer than expected due to the Ukraine crisis, and correspondingly, had to take countermeasures despite the absence of a governor,” Joo Sang-young, the acting chairman of the BOK's monetary policy board, said during a press conference.
Former governor Lee Ju-yeol retired in March. Governor nominee Rhee Chang-yong awaits a National Assembly hearing following his nomination in March.
The hike also came as the Fed is geared toward moving faster on U.S. interest rates after holding the rate near zero percent for more than three years, only to raise it to 0.25 to 0.5 percent on March 16.
The Fed's move prompted concerns that the interest gap between Korea and the U.S. may be reversed in the coming months, thereby prompting an outflow of foreign capital and further weakening the Korean won against U.S. dollar after the BOK kept the base rate on hold at 1.25 percent in its previous rate-setting meeting on Feb. 24.
The Fed is anticipated to raise the interest rate _ possibly 50 basis points in the most extreme case_ in its six remaining rate-setting meetings this year, including one in May.
Joo Sang-young, left, the acting chairman of the Bank of Korea's (BOK) monetary policy board, bangs the gavel to open a rate-setting meeting at the BOK headquarters in central Seoul. Thursday. Yonhap
The BOK projects consumer prices will not let up for the time being after topping 4 percent for the first time in more than 10 years in March.
Governor nominee Lee shares that view.
“Inflation is likely to remain above the BOK's projected outlook of 3.1 percent in the first half,” he said.
Adding to the market's woes, the BOK made a separate announcement on import prices, Thursday. The import price index, which is used as a pre-measurement of consumer prices, soared by 7.3 percent in March from the previous month, due to a spike in global prices of oil and raw materials. It was the steepest rise since May of 2008 when the index rose 10.7 percent.
Against this backdrop, Joo said the monetary policy board will take into account both growth and inflation in a balanced manner while hinting at additional rate hikes.
“The board will continue to conduct monetary policy with a focus on sustaining the recovery of economic growth and stabilizing consumer price growth at the target level over a medium-term horizon, while paying attention to financial stability,” he said.
“In this process, the board will judge when to further adjust the degree of accommodation while thoroughly assessing developments related to COVID-19, the risk of a buildup of financial imbalances, monetary policy changes in major countries, geopolitical risks, and the trends of growth and inflation,” Joo added.
Analysts forecast the BOK's policy rate will reach 2 percent by the end of this year.
“The BOK can make preemptive moves to keep inflation in check, given that stabilizing prices is the priority task pursued by President-elect Yoon Suk-yeol and his transition committee,” said Nomura Securities economist Park Jeong-woo, who correctly forecast Thursday's rate hike.
Korea Institute of Finance economist Park Sung-wook forecast the benchmark interest rate at the year-end to be at least 2 percent.
“Due to rapidly-changing external circumstances and financial markets, the monetary policy board may raise the rate more than three times this year,” Park said.
Yoon Yeo-sam, an analyst at Meritz Securities, said, “The central banks of the U.S, Europe, Australia and other major economies are considering tightening monetary policies and the BOK is likely to move in tandem with them by additionally hiking rates in July and October.”