BOK delivers 2nd 'big step' rate hike to curb inflation, capital flight

October 13, 2022


By Yi Whan-woo

The Bank of Korea (BOK) took another "big step" rate hike of half a percentage point Wednesday in a bid to fight inflation and prevent a possible capital flight amid the sharp depreciation of the Korean currency against the U.S. dollar.

It was the second outsized rate increase following one in July, and the fifth consecutive monetary tightening since April. Wednesday's decision sent the nation's benchmark rate back to 3 percent for the first time since October 2012.

The 3 percent rate is believed to be a level that can influence an economic slowdown, since it is higher than a 2.75 percent neutral rate, at which monetary policy is neither stimulating nor restricting economic growth.

Nevertheless, the BOK's monetary policy board still hinted at additional rate hikes, addressing that it sees "continuous rate hikes as warranted."

Bank of Korea (BOK) Governor Rhee Chang-yong bangs a gavel during a rate-setting meeting at the central bank in downtown Seoul, Wednesday. Yonhap

"The board will continue to conduct monetary policy in order to stabilize consumer price inflation at the target level over a medium-term horizon as it monitors economic growth, while paying attention to financial stability," it said in a statement after announcing the 50 basis point hike.

The central bank noted that consumer prices remain high in the mid- to upper-5 percent range, although growth slowed down after hitting an almost 24-year high of 6.3 percent in July.

It forecast such inflation will stay on the course for "a considerable amount of time," due to the impact of the weak Korean won against the U.S. dollar, which compounds inflationary pressure.

Concerning inflation outlooks for 2022 and 2023, the BOK said it will be generally consistent with the August forecast of 5.2 percent this year and 3.7 percent next year.

But the central bank warned of upside risks, which it said "are judged to be high due to the rising Korean won to U.S. dollar exchange rate and production cuts by major oil-producing countries."

"The board sees continued rate hikes as warranted, as inflation is expected to remain high, substantially above the target level, although domestic economic activity has slowed" it added.

The BOK expressed concerns over growth slowing down, saying gross domestic product (GDP) growth for this year "will be generally consistent with the August forecast of 2.6 percent, but that for next year is projected to be below the August forecast of 2.1 percent."

In a press conference after the rate-setting meeting, BOK Governor Rhee Chang-yong said most monetary board members see that the current upward rate hike cycle will likely end at around 3.5 percent.

Rhee said there might be another hike next month, but how sharp it will be lifted should be determined after analyzing the U.S. Federal Reserve's monetary policy and other relevant economic data.

He was referring to the Fed's hawkish credit tightening that has become aggressive in the past months and resulted in a higher U.S. benchmark interest rate than Korea's.

Before the BOK's "big step," Wednesday, the U.S. interest rate outpaced Korea's by a maximum 0.75 percentage point since the Fed's last rate-setting meeting in September where it carried out the third straight "giant step" by hiking its base rate by 0.75 percentage point to 3.0-3.25 percent.

While the "big step" has brought down the maximum interest gap to 0.25 percentage point, the gap can widen again considering the Fed is open to an extra "giant step" in its two remaining rate-setting meetings for this year in November and December.

The BOK only has one more rate-setting meeting this year, which will be held in November.

Analysts speculated that the BOK will carry out a third "big step" next month to reduce the Korea-U.S. interest rate gap as much as possible and prevent an outflow of foreign capital in search for safe haven assets.

"The BOK appears to be focusing on stabilizing inflation and currency volatility and it may go for another 'big step,'" said KB Securities analyst Lim Jae-kyun.

Hanwha Investment and Securities analyst Kim Sung-soo echoed a similar view, saying, "Whether the BOK will deliver a 50-basis-point hike again will depend on the Fed's course of monetary policy and the Fed is apparently becoming more aggressive."

Selected articles from The Korea Times