Growing Interest Rate Burden... Possibility of a 'Big Step' by the Bank of Korea Following Fed's Giant Step Increases

Domestic Expected Inflation and June Consumer Prices Key
July Big Step Possible... Year-End Base Rate May Reach 2.75%

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Due to the U.S. Federal Reserve's (Fed) 'giant step' (a 0.75% increase in the benchmark interest rate at once), there is a forecast that the domestic benchmark interest rate could rise more steeply than expected. There is even speculation about the possibility of a 'big step' of a 0.50% rate hike next month.

On the 19th, KB Securities initially predicted that the Bank of Korea (BOK) would implement additional rate hikes in the next month, August, and the fourth quarter, raising the year-end benchmark interest rate to 2.50%. They have now revised their forecast upward, stating that depending on economic indicators, a big step could be taken in July. BOK Governor Changyong Lee recently commented on the possibility of a big step next month, saying, "There are 3 to 4 weeks left until the next Monetary Policy Committee meeting, so we will decide after observing market reactions during that period," leaving the possibility open.

The Fed's giant step appears to have deepened the BOK's concerns. In the minutes of the Monetary Policy Committee meeting last May, the BOK stated that reaching the neutral interest rate is a priority. This indicates their judgment to focus on raising the benchmark interest rate to the neutral level to control demand-driven inflationary pressures. The neutral interest rate refers to a policy rate level that neither fuels inflation nor causes deflation. South Korea's neutral rate is estimated to be between 2.25% and 2.50% at most.

Meanwhile, with the Fed implementing the giant step, the BOK has no choice but to increase the speed or magnitude of its rate hikes. This is necessary to alleviate concerns about won depreciation and capital outflows, as well as to control inflation and inflation expectations.

Therefore, KB Securities expects the year-end benchmark interest rate to reach 2.75%. Following a sharp rise from 0.5% to 1.75% over the past 10 months, they foresee an additional increase of 1 percentage point (p). Researcher Jaekyun Lim of KB Securities explained, "If domestic inflation expectations, to be announced on the 29th, rise again and the consumer price index for June, scheduled for release on the 5th of next month, records around 6%, a big step (50bp) will be taken in July. In that case, with additional hikes in August and the fourth quarter, the year-end benchmark interest rate is expected to reach 2.75%."

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