BOK takes the first ‘big step’ of rate hike

The Bank of Korea has taken the first-ever “big step” by increasing the key interest rate by 0.5 percentage points.

The central bank’s bok monetary policy board held a rate-setting meeting on Wednesday and decided to raise the benchmark rate from 1.75 percent to 2.25 percent, marking the highest interest rate in eight years since August 2014 (2.25 percent). BOK Governor Rhee Chang-young announced that the rate-hike decision was made with a heavy sense of responsibility, saying that the bank considered “the need for preemptive response to the negative ripple effects of inflation.” The decision was made unanimously by the assent of all six board members.

The unprecedented rate-hike is taken as the central bank’s resolution to get a handle on the worst inflation the country has seen since the 1998 Asian Financial Crisis. In a letter of resolution, the BOK announced that the consumer price index is expected to continue to climb over 6 percent, and this year’s consumer inflation is likely to far exceed projections for May (4.5 percent).

The BOK strongly implied that it is set for further interest rate hikes. “Inflation surge is likely to continue down the road, and further rate hikes are necessary,” said Governor Rhee. “A progressive hike by 0.25 percentage points is recommended.”

There are three more monetary policy board meetings scheduled in August, October, and November, respectively. If rate-hike decisions are made in every remaining session to follow, the benchmark rate is projected to reach 3 percent by the end of this year.


Min-Woo Park minwoo@donga.com