Bank of Korea Raises Base Interest Rate by 0.25 Percentage Points... Annual Rate from 1.25% to 1.50% (Update)

Rising Inflation and Governor Absence: Bank of Korea's Rate Hike Decision

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jung] The Bank of Korea raised the base interest rate to 1.50% per annum, returning to the level just before the COVID-19 outbreak in July 2019. After raising the rate by 0.25 percentage points each in August and November last year and January this year, the Bank of Korea paused with a freeze in February. However, with the U.S. Federal Reserve (Fed) signaling a strong tightening stance, the Bank of Korea is tightening the reins on rate hikes again.

The Monetary Policy Board of the Bank of Korea held a policy meeting on the 14th and announced that it would raise the base interest rate from 1.25% to 1.50%, an increase of 0.25 percentage points. Although the Bank of Korea took a preemptive step by raising rates in August last year, the recent indication by the U.S. Fed that it might implement a 'big step' of raising rates by 0.5 percentage points at once as early as May to curb inflation has raised the need to accelerate the pace of rate hikes. Last month, U.S. consumer prices surged 8.5%, marking the largest increase since December 1981.

Domestic inflation is also signaling an emergency. Due to the impact of the Ukraine crisis, international oil prices have surged, causing the consumer price index in March to jump 4.1% compared to the same month last year. A rise above 4% is the first in 10 years and 3 months since December 2011 (4.2%). The problem lies in the expectation that prices will rise further. Unless there is a major turnaround, there are growing concerns that the annual consumer price inflation rate could soar to the 4% range, while economic growth forecasts may fall to the 2% range. The Monetary Policy Board convened amid a vacancy in the governor position, with the confirmation hearing for Lee Chang-yong, the nominee for Bank of Korea governor, scheduled for the 19th of this month. Despite the absence of a governor, the board proceeded with the rate hike due to increasing concerns over inflation.

According to the Bank of Korea's export-import price index statistics released that day, the import price index in March this year reached the highest level since statistics began in January 1971. Since import prices are reflected in consumer prices with a time lag, domestic inflationary pressures are expected to increase further.

Professor Sung Tae-yoon of Yonsei University's Department of Economics stated, "Inflation is intensifying, and with the U.S. rate hikes imminent, liquidity withdrawal is inevitable," adding, "There is a need for gradual and continuous rate increases." Professor Sung also noted, "Some express concerns about interest burdens due to rate hikes, but if rates are not raised now, they will have to be raised more sharply later," concluding, "From the perspective of interest burden, rate hikes are necessary."

This content was produced with the assistance of AI translation services.