Experts divided on timeline of BOK's first rate hike of the year

Experts remain divided over whether Korea’s central bank will carry out a rate hike at its first rate-setting meeting of the year set for Friday.

The upcoming monetary policy board meeting comes as the Korean economy continues to struggle with high inflationary pressure and the US Federal Reserve’s recent signal of a sooner-than-expected rate hike.

A majority of experts see a rate hike coming Friday or next month, and the Bank of Korea is expected to raise its benchmark interest rate at least once more for the rest of the year, they say.

BOK Gov. Lee Ju-yeol in recent months has been hinting at another rate hike within the first two months of this year, saying that the central bank must “adjust the pace of monetary easing in accordance with the economic circumstances in New Year,” in his New Year’s speech.

Following the monetary policy board’s decision to raise the base rate by 25 basis points to 1 percent in November -– its second pandemic-era rate hike after August -– Lee told the press that the rate remains dovish despite having reached 1 percent. He added that the possibility of another rate hike within the first three months of 2022, “doesn’t have to be ruled out.”

Nodding towards Lee’s remarks, Kiwoom Securities analyst Kim Yu-mi said the BOK is forecast to raise its base rate to 1.25 percent on Friday.

“Considering that the US Fed has recently adopted a more hawkish stance and Korea posted a stable performance in exports, there is a high possibility that Lee’s remarks refer to a rate hike on Friday,” Kim said.

“On top of it, a rise in the US Treasury yields could pressure the BOK to carry out a rate hike.”

Rising inflation and a strong dollar trend is likely to push the central bank towards a rate hike as well, another expert said.

“If the value of the Korean won declines then it will eventually result in upward pressure of import price and inflation,” Lee In-ho, an economics professor at Seoul National University said.

“The BOK will raise its rate to prevent a vicious cycle of foreign capital outflow and the continuing decline of won value.”

Korea’s consumer prices grew at the sharpest pace in a decade last year, growing 2.5 percent compared with a 0.5 percent gain the previous year. Surging global energy costs and high prices of farm products were key catalysts behind the high inflationary pressure.

The won was trading at 1,204 against the US greenback on Sunday at around noon, after surpassing the 1,204-won mark for the first since July 17, 2020, on Friday.

But with the omicron variant of the coronavirus sweeping through Korea, some say that the BOK may adopt a wait-and-see mode for the beginning of the year, freezing the interest rate at the current 1 percent on Friday.

“The COVID situation hasn’t improved, so the BOK might feel it is too early to carry out another rate hike at the moment,” Kang Sung-jin, an economics professor at Korea University said.

“They must put the COVID situation above the inflation – the problem was less severe in November before the omicron outbreak, but now, things are different.”

Korea’s daily coronavirus cases have been staying above 3,000 since Dec. 15, when the figure soared to a record high of 7,848 due to outbreak of the highly contagious omicron variant.

By Jung Min-kyung (mkjung@heraldcorp.com)