SEOUL– The Bank of Korea (BOK) will likely deliver another big-step rate hike this week, as it is striving to keep a lid on inflation amid growing worries over the impact of still-high energy prices and the local currency’s sharp descent against the U.S dollar on import bills, observers said Sunday.
The BOK is set to hold a rate-setting meeting Wednesday, one of the two remaining such gatherings by year-end. The central bank has hiked its key interest rate seven times by a combined 2 percentage points since August last year to combat inflation. They include an unprecedented big-step rate hike of 50 basis points in July, followed by a 0.25 percentage point increase in August.
Experts forecast that it is almost a done deal for the BOK to raise the cost of borrowing again this week, with many of them expecting a second rate hike of 50 basis points, given inflation pressures remain high and the fast-weakening local currency is compounding efforts to bring prices under control.
“The BOK sees that prices will not likely fall much despite its possible peak this autumn,” said Cho Young-moo, a researcher at LG Economic Research Institute. “The chances are high for a big-step rate hike as inflation are still rising at a very fast pace.”
The country’s consumer prices, a key gauge of inflation, rose 5.6 percent on-year in September, slowing from a 5.7 percent rise in August, thanks in part to eased price hikes of crude oil amid worries over a global economic slowdown.
Experts say inflation could be elevated anytime depending on the oil and energy price trajectory.
In a parliamentary audit session Friday, BOK Gov. Rhee Chang-yong echoed the view, saying inflation is expected to peak in October but remain high for a considerable period of time. He expected inflation will stay over 5 percent at least until the end of the first quarter of next year.
The case for another big-step rate hike is gaining more steam as the U.S. Federal Reserve is expected to continue to ratchet up its interest rate in the months to come to combat decades-high inflation.
Market observers say the Fed could deliver another giant-step rate hike of 75 basis points next month after rate increases of the same magnitude in its past three straight meetings.
Such aggressive increases have raised the Fed’s policy rate to a range between 3 percent and 3.25 percent, which is higher than 2.5 percent in South Korea.
Without a sharp rate hike this week here, the differential will likely widen further and could stoke worries that capital could leave South Korea fast in pursuit of high returns in the U.S., which could eventually accelerate the local currency’s descent against the greenback.
The won’s fall is feared to add upward pressure on inflation, as it makes imports more expensive.
South Korea has ramped up efforts to stall the won’s downswings by selling its dollar holdings, causing its foreign reserves to shrink at the fastest pace in about 14 years in September. The won has depreciated around 16 percent against the dollar so far this year.
The BOK has also cited the won’s decline as a major reason for raising the cost of borrowing.
“It is time to lift the rate sufficiently, like 0.5 percentage point, this time to defend the won,” Ha Joon-kyung, an economics professor at Hanyang University, said. “With the rate differential between Korea and the U.S. getting larger, lifting the rate could help not only defend the won but also make it easier to stabilize prices.”
Source: Yonhap News Agency