US Big Step Spurs BOK April Rate Hike Surge... Monetary Policy Committee 3-3 Tie 'Variable'

May Expected Amid BOK Monetary Policy Meeting on 14th Without Governor
US Fed Signals Stronger Tightening
Domestic Inflation Surges to 4% Range
Rate Hike Debate Gains Momentum This Month

6 MPC Members Tie Could Lead to Rejection
BOK Official Says "Not Very Likely"

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] As the U.S. central bank, the Federal Reserve (Fed), has signaled a ‘big step’ of raising the benchmark interest rate by 0.5 percentage points at once, the clock for raising South Korea’s benchmark interest rate is also ticking rapidly. Since the Bank of Korea’s Monetary Policy Committee meeting scheduled for the 14th will be held without a governor, the market initially expected a rate hike in May. However, with red flags lighting up in various indicators such as the recent inflation rate, the possibility of a rate hike this month has surged. The unprecedented situation where six Monetary Policy Committee members decide the benchmark interest rate in the absence of a governor is also a new variable.

◆"Fed is late" ? US intensifies tightening= Inside the Fed, there are even claims that interest rates need to be raised by a total of 3 percentage points by the end of the year, leading the market to take the May big step as a fait accompli. Even officials known for their dovish stance (preference for monetary easing) in the U.S. monetary authorities continue to send signals that aggressive monetary tightening is necessary to curb inflation. James Bullard, President of the Federal Reserve Bank of St. Louis, classified as a hawk (preference for monetary tightening) at the Fed, stated at a University of Missouri forum on the 7th (local time) that "the benchmark interest rate should rise to around 3.5% within this year." He strongly emphasized the need for a rate hike, saying the Fed’s response to inflation is lagging.

As the Fed’s tightening moves gain momentum, the Bank of Korea’s pace has also quickened. With the inflation rate hitting the 4% range for the first time in over a decade, emergency signals have been triggered, and with the outlook for continued upward momentum prevailing, there is a sense of crisis that the timing of a rate hike can no longer be delayed. Lee Chang-yong, the nominee for the Bank of Korea governor, expressed concern on the 1st that "the consumer price inflation rate for this year is likely to be higher than the Bank of Korea’s forecast (3.1%) in the first half." There is also a possibility of a rate inversion between Korea and the U.S. Kim Ji-man, a researcher at Samsung Securities, said, "While the timing of an additional rate hike is more appropriate in May when the nominee takes office and announces a revised economic outlook, a rate hike in April cannot be ruled out."

Lee Chang-yong, the nominee for Governor of the Bank of Korea, is arriving at the confirmation hearing office set up in the Booyoung Taepyeong Building on Sejong-daero, Jung-gu, Seoul, on the 1st, and responding to questions from the press. Photo by Joint Press Corps

◆Rate decision variable in a 3-3 tie situation= As a rate hike in April by the Bank of Korea becomes likely, attention is also focused on the Monetary Policy Committee’s decision-making without a governor. Since the confirmation hearing for nominee Lee is scheduled for the 19th, the April Monetary Policy Committee meeting will be held without a governor. This is the first time since 1998, when the Bank of Korea governor began to serve as the chair of the Monetary Policy Committee, that the governor has been absent from the main meeting. In this meeting, the fact that Monetary Policy Committee member Joo Sang-young, who strongly favors monetary easing, will serve as chair could also be a variable. According to the minutes from February, Joo stated, "It is appropriate to keep the benchmark interest rate at the current level of 1.25%." At that time, among the six Monetary Policy Committee members excluding the governor who did not make separate remarks, four mentioned the need for an additional hike, while Joo alone expressed a minority opinion.

According to Article 21 of the Bank of Korea Act, for a rate hike to be implemented at the April Monetary Policy Committee meeting, a majority of attendees among the six members (Lee Seung-heon, Deputy Governor of the Bank of Korea; Lim Ji-won, Cho Yoon-je, Seo Young-kyung, Joo Sang-young, and Park Ki-young) must express opinions in favor of a hike. If three of the six members propose a rate hike and two advocate for holding steady, and if Joo supports holding steady, the vote could be tied 3-3, resulting in the rejection of the rate hike. A Bank of Korea official said, "The chair usually does not express a personal opinion and plays a casting vote role," adding, "Since each member comprehensively discusses and finalizes opinions in the Monetary Policy Committee, the possibility of a 3-3 tie is not high."

Kim Jung-sik, emeritus professor at Yonsei University, said, "Although the inflation rate has risen to the 4% range, rushing a rate hike raises concerns about a recession," adding, "While there is strong justification for a hike, the absence of a Bank of Korea governor, responsibility issues, and political conditions such as the June local elections mean that a delay in the hike cannot be ruled out." In response, a Bank of Korea official said, "Since the Monetary Policy Committee is a collegial body, the governor’s vacancy will not be a major variable in the (rate hike) decision."

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