The Bank of Korea (BOK) delivered another big-step rate hike on Wednesday by raising its benchmark interest rate from 2.5 percent to 3 percent. It is the first time in 10 years that the rate has climbed up to the 3 percent range. In addition, the central bank raised the policy rate for the fifth consecutive time, marking another first in its history. The successive rate increases were aimed at responding to relentless inflation and the local currency's slide against the U.S. dollar.
The BOK also took into account the widening difference between the interest rates of Korea and the U.S. If the rare “rate reversal” continues, it could prompt capital outflows from domestic financial markets in pursuit of higher returns. On the other hand, the U.S. Federal Reserve's stance on keeping interest high remains unchanged. Therefore, monetary authorities must closely monitor and deal with inflationary trends and the dollar's super-strength.
The recent series of rate hikes seems somewhat inevitable because of runaway consumer prices and a weak Korean won. Inflation may peak this month but won't drop much from the current level. The BOK's latest move has narrowed the interest gap with the U.S. to 0.25 percentage points, but the Fed will likely take another giant step next month, widening the difference again. That will deepen the BOK's worries in deciding the size and pace of its next move.
There are many variables to consider, including the austerity stance of major countries. Releasing its “World Economic Outlook Report” Tuesday, the International Monetary Fund (IMF) lowered its forecast for next year's global economic growth to 2.7 percent, down 0.2 percentage points from its July estimate of 2.9 percent and 1.1 percentage points from its January estimate of 3.8 percent. The IMF pointed out that a storm cloud is gathering over the global economy due to persistent inflation, China's economic slowdown and Russia's war in Ukraine.
Policymakers need to realize that signs of a crisis are already weighing on the Korean economy. Stock market and currency market jitters continue. Trade deficit trends this year are serious indeed. A warning light is blinking even on the current account balance. Now is the time to devise and implement special policy steps. It is becoming increasingly urgent to work out preemptive and comprehensive countermeasures against risk signals across the economy.