Bank of Korea Faces Pressure to Raise Rates After Fed Hike

The Bank of Korea is likely to come under growing pressure to further raise its benchmark rate after the US Federal Reserve delivered its first rate hike in over three years to combat rising inflation, watchers said Thursday.

Overnight, the Fed raised its benchmark interest rate by a quarter percentage point in its first hike since July 2023 to the 3.75-4.00 percent range while signaling the possibility of another increase later this year amid persistent inflation and high oil prices.

The increase left the gap between the key interest rates of South Korea and the United States at up to 1 percentage point.

The Fed move came as the South Korean central bank lifted the benchmark interest rate to 3 percent over two straight meetings in July and August, marking the first back-to-back rate hikes since January 2023, when the central bank raised the rate at seven consecutive meetings starting in April 2022.

Analysts said rising inflation, combined with the rising currency rate and high household debt, will prod the BOK to further hike its benchmark rate within this year.

BOK Senior Deputy Gov. Kwon Min-soo, meanwhile, chaired a meeting early Thursday to review the potential impact of US interest rate policy on the domestic financial and foreign exchange markets.

During the meeting, Kwon said the Federal Reserve is expected to maintain its monetary tightening stance, considering Fed Chair Kevin Warsh signaled the possibility of another rate hike.

Kwon also pointed out that risks persist due to the situation in the Middle East, concerns over the fiscal soundness of major economies and uncertainties surrounding the artificial intelligence industry.

The central bank will remain vigilant and closely monitor the domestic financial and foreign exchange markets, with major economies, including Japan and Britain, also set to decide their key interest rates this week, Kwon added.

The BOK, meanwhile, is likely to raise the key rate possibly in November, rather than next month, as it assesses the impacts of back-to-back rate hikes.

"The minutes from the August monetary policy meeting show that the central bank's policy weighting is centered on the timing and the pace, rather than on whether to raise the rate or not," said Kim Myung-sil, an analyst at iM Securities.

In its latest report on monetary policy, the BOK said it will decide the timing and pace of further rate hikes while reviewing domestic and external conditions, as accelerating inflation and solid economic growth are expected to continue for some time.

"Given that robust growth and inflation exceeding the target level are expected to continue for a considerable period, it is necessary to determine the timing and pace of further rate hikes while monitoring changes in domestic and external conditions," it said.

The country's solid economic growth is also adding weight to an additional rate hike by the BOK as its nominal gross domestic product grew at the fastest pace in 47 years in the second quarter, driven by strong exports and investment related to artificial intelligence.

The expanded interest rate gap, along with still high housing prices in Seoul and its adjacent regions, will further press the BOK to keep its hawkish stance, experts said. (Yonhap)