Further increase interest rates expected amid record high oil prices

Oil prices on average have spiked to a new record high both in South Korea and the United States. As oil prices have only grown amid the ongoing inflation across the globe, the Federal Reserve or the U.S. central bank is expected to take a “giant step” to raise the key interest rate by as high as 0.75 percentage points at one go in the near future. Likewise, there is a growing consensus that the Bank of Korea will increase the key interest rate additionally around July and August.

The average oil price per liter across the nation was 2,068.07 won as of 2 p.m. on Sunday according to Opinet or a website on oil prices run by the Korea National Oil Corporation, reaching the highest level since data on oil prices were first collected on a daily basis in April 2008. Oil sold at an average of 2,064.59 won on Saturday, exceeding the highest level of 2,062.55 won per liter recorded on April 18, 2012 in 10 years and two months. However, it hit another new record high just in one day.

Oil prices in the United States recorded a new high as well. The American Automobile Association announced on Saturday (local time) that the average oil price across the country reached 5.004 dollars per gallon for the first time in history, which is converted to 1.32 dollars (1,690 won) per liter. Last months’ J.P. Morgan report projected that U.S. oil prices will go up to 6.2 dollars per gallon by August on average.

Increasing prices in the U.S. market only fuel concerns over a slowdown in consumption given that oil prices have a profound impact not only on utility bills, freight and airfares but also on agricultural goods and fertilizers.

With oil prices on the rise amid inflation, it is expected that the U.S. Federal Reserve will take a “giant step” in the forthcoming FOMC meeting scheduled this Tuesday and Wednesday. Also, Bank of Korea Governor Rhee Chang-yong implied last Friday an additional increase in the key interest rate, saying, “The role of a central bank in fight against inflation is getting bigger over time.”


Hye-Ryung Choi herstory@donga.com