BOK policymakers worried about entrenched high inflation in hiking rate in Aug.

Finance

Published: 14 Sep. 2022, 10:18

BOK policymakers worried about entrenched high inflation in hiking rate in Aug.

Bank of Korea Gov. Rhee Chang-yong, center, presides over a Monetary Policy Committee meeting at the central bank in Seoul on Aug. 25, 2022. [YONHAP]

Monetary policymakers of the Bank of Korea (BOK) voiced concerns over the possibility of high inflation getting entrenched when they voted to raise the central bank's policy rate last month, minutes of the latest rate-setting meeting showed Tuesday.

One of the policymakers also took into consideration a possible widening of rate differences between Korea and the United States, and its impact on financial markets, as the Federal Reserve is accelerating its monetary tightening to tame inflation, according to the minutes.

On Aug. 25, the seven-member monetary policy board members voted unanimously to raise the rate by 0.25 percentage point. This marked the seventh rate increase since August last year and came after the first-ever "big-step" 0.5 point hike in July.

"The top priority in monetary policy should be placed on preventing high inflation from getting entrenched in our domestic economy," an unidentified member was quoted as saying. "It is necessary to maintain the stance of raising rates for the time being to keep a lid on inflation pressures and high inflation expectations."

Another member echoed the view, saying the current path of tightening should continue as long as financial stability is not undermined.

"In the two remaining meetings until the end of this year, I think we need to keep the rate-increasing stance as long as there are no huge unexpected factors that warrant changes," the member said.

Korea's consumer prices, a major indicator of inflation, rose 5.7 percent last month from a year earlier after surging 6.3 percent in the previous month, which marked the highest level in about 24 years.

The possibility of rate differences in Korea and the U.S. widening was also cited as a cause for concerns at a time when the Fed has been aggressively raising borrowing costs, making the rate in the U.S. higher than that in Korea.

Market watchers are currently predicting the Fed will likely deliver another 75-basis-point hike next week following the same extent of increases in June and July. Worries have arisen that the higher rate in the U.S. could prompt capital to leave markets here in pursuit of better returns.

"It is desirable that excessive differences in rates with the U.S. should not continue," the member said. "Should the inverted period prolong as the gap widens or instability in emerging markets spread, a possibility cannot be ruled out that foreign capital could flow out."

Yonhap