Seoul: The Bank of Korea is anticipated to face increasing pressure to further elevate its benchmark rate following the U.S. Federal Reserve's first rate hike in over three years, which aims to address rising inflation.
According to Yonhap News Agency, the Federal Reserve raised its benchmark interest rate by a quarter percentage point, marking the first increase since July 2023, bringing it to the 3.75-4.00 percent range. This move signals the potential for another increase later this year, as inflation remains persistent alongside high oil prices. The recent hike has widened the gap between the key interest rates of South Korea and the United States to up to 1 percentage point.
The Fed's decision comes on the heels of the South Korean central bank's actions, which raised the benchmark interest rate to 3 percent across two consecutive meetings in July and August. This marked the first instance of back-to-back rate hikes since January 2023, when the central bank increased the rate at seven successive meetings starting in April 2022.
Analysts suggest that the combination of rising inflation, an increasing currency rate, and high household debt will drive the Bank of Korea to further raise its benchmark rate within the year. The central bank is likely to hike the key rate in November, rather than next month, as it evaluates the impacts of the recent consecutive rate hikes.
Kim Myung-sil, an analyst at iM Securities, noted, "The minutes from the August monetary policy meeting indicate that the central bank's policy focus is on the timing and pace, rather than the question of whether to raise the rate."
In its recent monetary policy report, the Bank of Korea stated that it would determine the timing and pace of further rate hikes while assessing domestic and external conditions, as continued accelerating inflation and solid economic growth are expected. The report emphasized the need to monitor changes in both domestic and external conditions while planning additional rate hikes.
South Korea's robust economic growth is also bolstering the case for an additional rate hike by the Bank of Korea. The country experienced its fastest nominal gross domestic product (GDP) growth in 47 years during the second quarter, primarily driven by strong exports and investment in artificial intelligence (AI).
The widened interest rate gap, coupled with persistently high housing prices in Seoul and its surrounding areas, will further pressure the Bank of Korea to maintain its hawkish stance, analysts indicate.