BOK hints at hike in interest rates

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BOK hints at hike in interest rates

The governor of the nation’s central bank said Thursday that the Bank of Korea (BOK) will watch carefully the widening gap in interest rates between Korea and the United States. The U.S. Fed hiked its federal fund rate on Thursday up 0.25 percentage points, to 2 to 2.25 percent, pushing U.S. rates to 0.75 percentage points higher than the Korean base rate.

BOK Gov. Lee Ju-yeol’s remarks were seen as a signal of an interest rate hike, possibly this year, to curtail the increasing difference in rates.

“[The Bank of Korea] will monitor capital inflows with more caution, given that the gap widened to 0.75 percent and the United States will continue to raise rates,” Lee said.

Until yesterday, the governor had not explicitly mentioned concerns about higher U.S. interest rates, although market analysts have warned that they could trigger capital flight from Korea to the United States or other economies with more favorable rates than Korea’s.

Korea’s benchmark interest rate has stood at 1.5 percent for nine consecutive months since the central bank hiked the benchmark rate from a record-low 1.25 percent last November; that was the BOK’s first rate hike in six and a half years.

With hints of a rate rise, observers saw a possibility of changes to an accommodative monetary policy to unwind the expansionary measures used since the beginning of the global recession in 2008. Lee, however, said that the central bank has not suggested anything it has not already signaled.

“[The Bank of Korea] has consistently mentioned the need to tighten the accommodative stance because of the possibility of financial imbalances and macroeconomic problems, and that hasn’t changed,” the governor said.

Analysts say that the U.S. hike adds to the pressure for a rate hike at the coming monetary policy meetings this year, set for October and November.

“Considering the September hike and the future pace of rate rises in the United States, the Bank of Korea would feel more pressure to raise its benchmark rate,” said Shin Dong-soo, an analyst at Eugene Investment & Securities.

“Board members of the monetary policy committee have made more hawkish comments recently, a sign that could mean more votes for a rate hike,” he added.

Lee Il-houng, a board member, voted to raise the key interest rate at the last two meetings. In the August meeting, two additional members brought up the need to raise the rate in the future, according to the meeting’s minutes.

Both the Finance Ministry and the Bank of Korea said that the widely expected rate hike would have a limited impact on Korea’s economy, since the move was already priced into the markets.

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