Bank of Korea likely to raise interest rate for seventh time in January

[Source : BOK]

Bank of Korea is expected to raise the benchmark interest rate for a seventh month later this month even though the country’s inflation faces more pressure as electricity, fuel and mass transportation fees have been increased this year.

The central bank’s Monetary Policy Board is set to meet on Jan. 13 for its first meeting this year.

The average selling price of gasoline at gas stations nationwide in the first week of January reached 1553.55 won ($1.24) per liter, up 26.63 won from the previous week, according to Korea National Oil Corp.’s oil price information system Opinet on Sunday. Gasoline prices showed a rise for the first time in 17 weeks due to the slowing reduction in fuel tax.

The costs to prepare dishes for Lunar New Year is expected to rise by as much as 6 percent compared to the previous year. Prices at traditional markets and big supermarkets are expected to rise by 6.3 percent and 4 percent, respectively from last year.

“It’s hard to say that the upward inflation trend has eased yet,” said Kwark Noh-sun, a professor of economics at Sogang University. “With inflationary pressure still in presence, the central bank may be hesitant to put a break on the interest rate hike as it can give the wrong signal to the market.” The priority of BOK Governor Rhee Chang Yong has also been “price stability.”

BOK Governor Rhee Chang Yong [Photo by Park Hyung-ki]

The difference in interest rates between South Korea and the U.S. is another reason why it’s doubtful BOK will freeze interest rate. The U.S. Federal Reserve raised its benchmark interest rate by 0.5 percentage point last year, widening the interest rate gap between the two countries to 1.25 percentage points. The difference is the largest in 22 years since October 2000. The Federal Reserve forecasts the base rate at 5.1 percent by the end of this year and BOK will have no choice but to keep pace with the Fed. Kim Young Sik, an economics professor at Seoul National University, said, “Governor Rhee’s statement that BOK can’t be free from Fed’s decisions is true in reality and tightening measures are likely to continue.”

In contrast, some say clear signs of economic recession can change the situation. BOK predicts this year’s economic growth rate at 1.7 percent and sees that the South Korean economy would slow down in the first half and rebound in the second half. In addition, the government unveiled deregulatory measures first thing this year to keep the real estate market afloat, which could stop the central bank from raising the interest rate, according to experts. This is in line with Rhee’s emphasis on “policy harmony” in his New Year‘s address.

The risk of a financial crunch remains. In the debt market based on real estate project financing loans, which triggered the short-term capital market crunch last year, 22 trillion won worth of securitized debt are expected to mature by the first half of this year.

There is mixed outlook from the investment industry. European investment bank BNP Paribas predicted a 0.25 percentage point increase in interest rates, saying, “The central bank will focus on balancing as its policy objectives of growth rate, inflation and financial stability conflict with each other.” Meanwhile, Citibank predicted the benchmark rate to be unchanged, saying, “An interest rate hike in the first quarter may delay the stabilization of the short-term capital market and has the risk of aggravating the slowing housing market.” It draws attention if the interest rate hike will continue or not following BOK’s Jan. 13 meeting.