Inflation and Supplementary Budget... Bank of Korea's First Ever Possibility of Three Consecutive Rate Hikes

US Fed Likely to Deliver Consecutive Big Steps in June and July
Exchange Rate Surge Drives Inflation... Additional Budget Expected
Financial Instability May Worsen if Korea-US Interest Rates Invert
Bank of Korea May Raise Rates Again in July Following May Increase

As the U.S. Federal Reserve's (Fed) 'big step' policy (a 0.5 percentage point interest rate hike at once) is likely to continue until July, there are forecasts that the Bank of Korea (BOK) may raise its benchmark interest rate for three consecutive times for the first time in history, following last month, in May and July.

According to the financial market on the 13th, the U.S. April Consumer Price Index (CPI) surged 8.3% year-on-year, increasing the likelihood that the Fed will take consecutive big steps in June and July to stabilize prices. This has caused the won-dollar exchange rate to soar and the domestic stock market to falter, creating significant aftershocks. U.S. President Joe Biden said immediately after the CPI announcement, "Prices are unacceptably high," and Jerome Powell, the Fed Chair who has repeatedly indicated the big step policy, was overwhelmingly reappointed on the same day, making the U.S. tightening stance appear as a fait accompli.

For this reason, the financial market analyzes that the BOK may raise the benchmark interest rate not only at the Monetary Policy Committee meeting on the 26th of this month but also at the July 13th meeting consecutively. Since the introduction of the benchmark interest rate system in 2000, the BOK has never raised the benchmark interest rate three times in a row, so if it raises rates in May and July, it will be the first time in history. Park Jung-woo, an economist at Nomura Securities, said in a recent report, "The BOK is still concerned about high inflation," and predicted, "The benchmark interest rate will be raised by 0.25 percentage points at the May and July meetings."

The Yoon administration's push for the largest supplementary budget in history is also adding momentum to the rate hikes. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said, "Since the supplementary budget was prepared without additional government bond issuance, the impact on interest rates and prices will be minimized," but the increase in market liquidity is likely to fuel inflation. Former Monetary Policy Committee member Lim Ji-won, who ended his term the day before, said in his farewell speech, "As the high inflation rate prolongs, the growth-inflation trade-off problem may worsen," indicating that the conditions surrounding monetary policy are not easy.

The growing likelihood of interest rate inversion between Korea and the U.S. is also a burden. Currently, the U.S. benchmark interest rate is 0.75?1.0%, and Korea's is 1.5%. Even if the BOK raises rates by 0.25 percentage points in May, if the Fed takes big steps in June and July, the rates will invert.

Some in the financial market also analyze that the BOK will raise the benchmark interest rate from the current 1.5% level to 2.5% this year. Earlier, global investment bank (IB) JP Morgan also forecasted that the BOK would raise the benchmark interest rate four more times within the year, including May, making the year-end benchmark rate 2.5%. Professor Kang Sung-jin of Korea University’s Department of Economics said, "If interest rates are not raised quickly, even at the cost of some growth, money will flow out, concentrating the damage."

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