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| Bank of Korea (BOK) Governor Rhee Chang-yon speaks during the latest BOK's rate-setting at the BOK headquarters in central Seoul, Aug. 25. Korea Times file |
By Yi Whan-woo
Higher-than-expected inflation in the United States is putting pressure on the Bank of Korea (BOK) to take another "big step" by raising the key interest rate by a half percentage point in the next meeting of its monetary policy board scheduled for Oct. 12.
The BOK took an unprecedented "big step" in June but is still applying incremental rate increases, as addressed by its governor Rhee Chang-yong, who recently described the increases as an anti-inflationary measure as well as a long-term response toward hawkish U.S. monetary policy.
But whether the BOK can stick to a policy of a 25 basis point rate hike remains in question, as the U.S. Federal Reserve is appears poised to take an "ultra step" in its upcoming rate-setting meeting from Sept. 20 to 21.
This could amount to as much as a 1 percent hike since U.S. inflation in August remained stubbornly high ― 8.3 percent ― and raises the chance of the Fed being swayed toward more aggressive credit tightening.
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"Under the circumstance, the BOK may be forced to take a 'big step' to placate concerns over impacts from U.S. inflation shock to the financial market," said Lee Jeong-hwan, an economics professor at Hanyang University.
The professor noted Korea was hit by the market volatility, such as a surge in the won-dollar exchange rate and collapses of benchmark KOPSI, even when Fed officials hinted at taking a third "giant step" of a 75 basis point rate hike after July.
The Fed policymakers' stance came before the U.S. inflation rate was announced for August, as a part of broader strategy aiming to bring down the 2022 inflation target goal of 2 percent.
The Korean currency has lost 5.9 percent in its value against the greenback since the end of July and slid to a 13 and half year-low of 1397.9 won per dollar, Thursday.
KOSPI mostly has been taking a beating in September and closed at 2,382.78 points, Friday, down 0.79 percent from the previous session's close.
"A weakening won and plummeting stock market are all related to investors' search for a safer haven amid the growing chance of a higher U.S. interest rate than Korea's, and a 'big step' will possibly be back on the table when the BOK's monetary policy board meets next month," Lee added.
The interest rates of U.S and Korea currently remain the same at 2.5 percent. But the former has a better chance to outpace the latter, especially given the fact Fed has three rate-setting meeting remaining this year, including November and December, while the BOK only has two more in October and November.
Ahn Dong-hyun, a Seoul National University economics professor, said the widening trade deficit over the weakening won and a sharp increase in import prices also makes it necessary for the BOK to consider a "big step."
"The import prices are adding to pressure from consumer prices increases, and a failure to cope with inflation can increase risks of stagflation or even recession," he said.
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