BOK pressed to further raise key rate to track Fed's latest hike
The widening Korea-U.S. rate gap is expected to push the Bank of Korea toward another hike as inflation, household debt and housing prices remain elevated.
A New York Stock Exchange trader looks at a screen after the Federal Reserve raised interest rates on Sept. 16.REUTERS/YONHAP
The Bank of Korea (BOK) is likely to come under growing pressure to further raise its benchmark rate after the U.S. 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 to 4.00 percent range while signaling the possibility of another increase later this year amid persistent inflation and high oil prices.
The increase widened the gap between Korea and U.S. key interest rates to as much as 1 percentage point.
The Fed move came as the 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.
The BOK 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.
Federal Reserve Board Chairman Kevin Warsh speaks during a news conference at the Federal Reserve in Washington on Sept. 16.AP/YONHAP
"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 GDP grew at the fastest pace in 47 years in the second quarter, driven by strong exports and investment related to AI.
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, they said.
