Bank of Korea takes 'big step' with half-point increase

The Bank of Korea Gov. Rhee Chang-yong at the monetary policy board meeting held in central Seoul on Wednesday. [NEWS1]

Korea's base rate was increased by 50 basis points to 3.0 percent on Wednesday.

The decision by the central bank’s Monetary Policy Board follows a 25-basis-point increase on August 25 and comes three months after its first-ever 50-basis-point increase on July 13.

It was a widely expected move, with almost all analysts polled by Reuters forecasting the half-point hike.

Korea’s central bank is in a difficult position as the won weakens and the property market teeters. If it is too dovish, the currency could further weaken and inflation could remain high. If it is too hawkish, bankruptcies could increase and the economy could slow dramatically.

Inflation in Korea hit 5.6 percent in September, and won is down around 20 percent this year. It is at a 13-year low against the dollar.
Despite the "big step" — which is how the Korean press is describing half point increases — the base rate is still lower than the Federal Reserve’s federal funds rate, which was raised by three quarters of a percentage point in September to a range of 3 percent to 3.25 percent. This is the highest since early 2008.

Following a moderate September jobs report in the U.S., the Fed is expected to raise the rate by another 75 basis points in November. FedWatch, which is run by the CME Group and forecasts rates using Fed Fund futures contract prices, puts the chance of a three-quarter point increase at 81.3 percent. The unemployment rate in the United States fell to 3.5 percent in September, from 3.7 percent a month earlier.

“The U.S. registered a moderate September job report, which gives more room for the Fed to further pull up the federal funds rate to tame inflation,” said Kim Sung-soo, an analyst at Hanwha Investment & Securities. “The terminal rate for Bank of Korea’s base interest rate is 4 percent at the end of the first half next year."

The terminal rate is where the benchmark interest rate will come to rest before the central bank starts trimming it back.

Rates are set by the Monetary Policy Board eight times a year. Its last meeting in 2022 is scheduled for Nov. 24.

BY JIN MIN-JI [jin.minji@joongang.co.kr]