Bank of Korea raises rates by a quarter point

Bank of Korea Gov. Rhee Chang-yong at the monetary policy board meeting held in central Seoul on Nov. 24. [YONHAP]

The Bank of Korea raised the policy rate by a quarter percentage point to 3.25 percent on Thursday.

The decision by the central bank’s Monetary Policy Board follows a 50-basis-point increase in October and is the sixth consecutive rate increase.

It was a widely expected move, with almost all bond analysts polled by Korea Financial Investment Association forecasting the quarter percentage point increase. They were polled from Nov. 11 and 16. Out of 100 participants, 70 percent made the quarter point forecast.

Expectations for more subdued inflation and a more stable currency helped market sentiment, as has the rollout of the market stabilization measures, according to the association.

After reaching 1,444.2 won per dollar on Oct. 25, the won fell to the 1,300 won-range earlier this month.

Inflation in Korea “appears to have peaked,” Jeremy Zook, director, Sovereigns at Fitch Ratings, told reporters on Nov. 11. He added that the central bank will hold rates at 3.5 percent through 2023.

The reason the central bank “raised interest rates in ‘big step’ despite adding pressure to domestic economy and financial market is because of the exchange rate,” said An Young-jin, an economist at SK Securities.

The currency rate has stabilized compared to the past months, but the Bank of Korea should note that the currency may start to fall again when the rate difference with the United States grows following the Federal Reserve’s rate-setting meeting scheduled in December, he added.

The Federal Reserve upped the federal funds rate by three-quarters of a percentage point on Nov. 2. Fed Chair Jerome Powell said it was “very premature to be thinking about pausing” rate increases following the November rate announcement.

A policymaker of the Bank of Korea expressed concerns about the growing rate gap.

“Due to the FOMC results, the rate reversal has widened and deepened difficulty for monetary policy decisions,” Suh Young-kyung, one of the central bank’s seven monetary policy board members, said at a forum in Seoul on Nov. 15.

An projected the global rate increases to peak in the first quarter next year and possibly start to fall in the fourth quarter if a soft landing is achieved.

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