Bank of Korea raises rates a quarter point in unanimous vote

Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held in central Seoul on Thursday following the Monetary Policy Board meeting held earlier on the same day. [BANK OF KOREA]

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

It was a unanimous decision by the Monetary Policy Board and the sixth increase in a row. The last was of 50 basis points in October.

The board cited high inflation, a slowdown in growth, a stabilized exchange rate and trouble in the short-term money market as the reasons.

The board believes there’s a “need to continue raising the base interest rate for some time as inflation above the target level is projected to continue for a considerable time,” Bank of Korea Gov. Rhee Chang-yong said during a press conference held Thursday.

Rhee added that the board’s decision in the rate-setting meeting in January will be made after reviewing the Federal Reserve’s move in its December meeting and its impact on the foreign exchange market and international energy prices.

The board’s Thursday decision was a widely expected move, with the majority of bond analysts polled by the Korea Financial Investment Association forecasting the quarter percentage point increase. They were polled from Nov. 11 to 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 returned to the 1,300 won-range earlier this month. The won gained 1.75 percent in value against the dollar Thursday.

The board was split on the terminal rate. Three members from the board proposed 3.50 percent, while two proposed the possibility of going to 3.75 percent. One member said 3.25 percent is desirable.

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, referring the half point increase.

The currency rate has stabilized, 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.

“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 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.

Also on Thursday, the central bank maintained the forecast for Korea’s GDP to grow by 2.6 percent in 2022. The growth for next year was revised down to 1.7 percent from the 2.1 percent projected in August.

The bank also revised down Korea’s inflation forecast for this year to an annual 5.1 percent from the 5.2 percent forecast made in August. The forecast for next year was revised down to 3.6 percent from the previous 3.7 percent.

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