▲ Bank of Korea Governor Rhee Chang-yong (Note: Shin Hyun-song in original Korean text) taps the gavel during a Monetary Policy Board meeting at the Bank of Korea in Jung-gu, Seoul, on August 27.
With the U.S. Federal Reserve raising its benchmark interest rate for the first time in 3 years and 2 months, expectations are growing that the Bank of Korea (BOK) may also deliver additional rate hikes within the year.
While the need for policy action to counter underlying inflation remains valid, other factors cited as potential reasons for further hikes include mounting upward pressure on exchange rates due to the widening interest rate gap between South Korea and the United States, as well as rising instability in housing prices in the greater Seoul area.
However, some market observers project that because the BOK already implemented consecutive rate hikes in July and August, it may adjust its pace to assess the impact of these policies and ease the burden on vulnerable groups.
During its regular Federal Open Market Committee (FOMC) meeting held on September 15–16, the Fed raised its policy rate (benchmark interest rate) target range by 0.25 percentage points to 3.75–4.00% percent.
This marks the first time the U.S. policy rate has been increased since July 26, 2023, when it was raised by 0.25 percentage points to 5.25–5.50% percent.
The Fed cited persistent inflation concerns as the primary reason for shifting its monetary policy stance toward tightening.
Geopolitical uncertainties across the Middle East, which began with the outbreak of war in Iran in late February, have been prolonged, heightening inflation concerns driven by rising oil prices.
In its rate decision statement, the Fed noted, "Inflation remains somewhat elevated," adding, "Today's action will support a timely return to our 2 percent inflation goal."
Fed Chair Kevin Warsh also emphasized during a press conference, "It's clear that inflation is too high and has stayed too high for too long."
Furthermore, the Fed hinted at the possibility of additional rate increases within the year.
According to the dot plot released on this day, the median year-end rate projection among 18 of the 19 FOMC members—excluding Chair Warsh—stood at 4.1% percent, up 0.3 percentage points from June.
Out of the 18 members, 12 projected a range of 4.00–4.25% percent (0.25 percentage points higher than the current level), 4 expected 4.25–4.50% percent, and 2 anticipated 3.75–4.00% percent.
Considering the Fed's pivot to tightening and underlying inflationary trends, the BOK's Monetary Policy Board also appears likely to pursue additional benchmark rate hikes before the year ends.
South Korea faces similar inflation concerns driven by rising oil prices as the United States.
Lee Ji-ho, Deputy Governor of the BOK, stated during a price inspection meeting on September 2, "Consumer price inflation in September will likely continue its underlying upward trend, led by core items."
The BOK is particularly concerned that strong economic growth, fueled by the semiconductor boom, could act as a demand-side pressure and further stimulate inflation.
The nominal gross domestic product (GDP) growth rate for the second quarter reached 26.4% percent (compared to the same period last year), marking the highest level in 47 years since the third quarter of 1979 (27.7% percent).
In its monetary and credit policy report released on September 10, the BOK pointed out, "We must pay close attention to the possibility that the surge in nominal growth could amplify price pressures from the demand side and increase risks of financial imbalances."
Another variable the Monetary Policy Board may weigh is the potential for increased upward pressure on the exchange rate, as the Korea-U.S. interest rate gap widened again from 0.75 percentage points to 1.00 percentage point on the upper end following the Fed's rate hike.
After surpassing 1,560 won in early June to hit a post-financial crisis high, the exchange rate shifted to a downward trend in July, dropping to the low 1,330 won range on September 9.
However, ahead of the U.S. FOMC, it climbed back up to the 1,370 won range after rising for three consecutive days through the previous day.
In addition, the recent clear rebound in housing prices, centered around mid-to-low priced areas in Seoul and parts of Gyeonggi Province, is cited as another key variable supporting a rate hike.
Even if the Monetary Policy Board implements an additional benchmark rate hike within the year, prevailing forecasts suggest November is more likely than October.
Having raised rates consecutively in July and August, the central bank emphasized that these moves were proactive measures.
It has also repeatedly signaled its intention to fully evaluate the ripple effects, having moved a step ahead in raising rates.
In its previous monetary policy direction resolution, the Monetary Policy Board even omitted the phrase "it is judged necessary to continue the rate hike stance going forward," hinting at a temporary adjustment in pace.
The median value of the Board's August dot plot (rate forecast six months out) stood at 3.25% percent per annum, which is 0.25 percentage points higher than the current level (3.00% percent).
Amid ongoing debates over the duration of the semiconductor cycle, a relatively moderate economic recovery outside of semiconductors could also serve as a factor for consideration.
According to the minutes of the August Monetary Policy Board meeting recently made public, several members expressed concern that consecutive benchmark rate hikes could increase the financial burden on vulnerable groups.
With delinquency rates among vulnerable borrowers, such as multiple-debtors, soaring, further rate hikes could trigger soundness risks.
Some sectors have also raised concerns over deepening polarization.
(Photo: Yonhap News)
※
Copying, redistribution, and unauthorized use in AI training are strictly prohibited.