Bank of Korea raises rates a quarter point in expected move

Bank of Korea Gov. Rhee Chang-yong at the Monetary Policy Board meeting held in central Seoul on Friday. [NEWS1]

The Bank of Korea raised the policy rate by a quarter percentage point to 3.50 percent on Friday.

The decision by the central bank’s Monetary Policy Board follows a 25-basis-point increase in November. The central bank started to raise the policy rate in August 2021. The last time the bank kept the rate unchanged was in February 2022.

It was a widely expected move as inflation remains above the target range at 5 percent. More than 65 percent of bond analysts polled by Korea Financial Investment Association forecast the quarter percentage point increase.

A hundred people, including fund managers and analysts, participated in the poll held from Jan. 3 through Jan. 5.

They cited concerns about inflation and the rate gap with the Fed as the reasons for their projection.

The federal funds rate is currently 4.25 percent to 4.50 percent. The next two-day Federal Open Market Committee meeting starts on Jan. 31.

Korea raised electricity rates in the first qurter by 9.5 percent, the most in four decades.

Bank of Korea Gov. Rhee Chang-yong said earlier this month that fighting inflation will remain the central bank's top priority this year.

“We will maintain monetary policy with a focus on price stability but at the same time take note of changes in conditions in the economy, and the financial and foreign exchange markets as well,” Rhee said.

Rhee is “expected not to entirely sever the chance of an additional rate increase” and is forecast to “leave the upper range of the policy rate open,” said Kim Ji-na, an analyst at Eugene Investment.

Kim added that a rise to 3.75 percent is possible, considering the strong will of the United States for monetary tightening.

“We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” said Federal Reserve Chairman Jerome Powell in a press conference last month. “We are continuing the process of significantly reducing the size of our balance sheet.”

The Bank of Korea’s next policy meeting is Feb. 23rd.

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