BOK’s “big step” puts key rate at 3% for first time in 10 years

Posted on : 2022-10-13 17:15 KST Modified on : 2022-10-13 17:39 KST
Wednesday’s 50-basis-point hike was the 5th consecutive rate increase by the central bank as it continues to combat inflation and a high exchange rate
Gov. Rhee Chang-yong of the Bank of Korea furrows his brow in this undated file photo. (Yonhap)
Gov. Rhee Chang-yong of the Bank of Korea furrows his brow in this undated file photo. (Yonhap)

The Bank of Korea has taken another “big step” rate hike, raising the base interest rate to 3% for the first time in 10 years. The central bank has been frantically raising interest rates to stabilize the Korean won to US dollar exchange rate, which has soared to around 1,400 won per dollar.

The bank’s monetary policy board raised the base interest rate by 50 basis points from 2.5% to 3% per year at a meeting on Wednesday.

This “big step” comes three months after the Bank’s first such measure in July of this year.

As a result, Korea’s base interest rate is now 3% for the first time since the period from March 2011 to October 2012.

The most recent action follows rate hikes in April, May, July and August and marks the first time in history that the Bank of Korea has raised the interest rate five consecutive times.

Rhee Chang-yong, governor of the Bank of Korea, said in a press conference, “I am well aware that people are experiencing increasing pain amid the recent steep rate hikes,” adding, “I ask for the nation’s understanding that rate hikes are unavoidable for preventing greater losses in the economy as a whole.”

The bank’s 0.5-point rate hike is interpreted as a show of its determination to put the brakes on the high won-dollar exchange rate, which continues to hover around 1,400 won. The exchange rate has not cooled down since it exceeded 1,400 won immediately following the US Federal Reserve’s “giant step” of increasing the interest rate by 0.75 percentage points last month.

The Bank of Korea has been concerned that the high exchange rate is likely to lead to a rise in import prices and subsequently accelerate inflation.

The Bank of Korea expects that reversing the Korea-US interest rate gap, which has been reduced to 0.25 percentage points, will encourage the exchange rate to fall.

Over the past three weeks, the interest rate gap between the two countries has widened to 0.75 percentage points based on the upper limit of the US’ policy rate target (3.0%-3.25%).

In a statement on the decision, the bank’s monetary policy board said that it judged that “the policy response should be strengthened, as additional inflationary pressures and the risks to the foreign exchange sector have increased affected by the rising Korean won to US dollar exchange rate, while inflation has remained high.”

The Bank of Korea’s base rate is expected to reach a final high of around 3.5%. The monetary policy board will hold its final meeting of the year to decide the direction of the country’s monetary policy, including the interest rate, on Nov. 24.

Rhee said, “Most board members do not seem to have views differing significantly [from the market’s prediction that the interest rate will likely go no higher than 3.5%]. However, there are some members who believe it will be lower than that, so it is not definite.”

Regarding whether the bank will take another “big step” next month, he only said, “It is difficult to decide presently as board members have many differing opinions on the matter and there are many different things to consider.”

Five out of seven members voted in favor of the 0.5-percentage-point rate hike. Shin Sung-hwan and Joo Sang-yong held a minority opinion that the rate should be increased by 0.25 percentage points.

On Wednesday, the Korean won to US dollar exchange rate closed at 1,424.9 won on the Seoul foreign exchange market, down 10.3 won from the previous day. The exchange rate, which opened at 1,430.0 won, inched upward immediately after the announcement of a rate hike and rose to 1,436.0 at one point during trading. The subsequent decline has been attributed to a strong pound following news that the Bank of England will extend its gilt purchase program, as well as to a weakening dollar globally.

By Lee Jae-yeon, staff reporter

Please direct questions or comments to [english@hani.co.kr]

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