BOK pressed to further raise key rate to track Fed's latest hike

The U.S. Federal Reserve has implemented its first interest rate increase in over three years to tackle rising inflation, prompting the Bank of Korea (BOK) to face mounting pressure to follow suit, according to financial watchers. The Fed raised its benchmark interest rate by a quarter percentage point, from 3.75-4.00 percent to 4.00-4.25 percent, signaling the possibility of additional hikes this year due to persistent inflation and high oil prices.

This rate hike widened the gap between South Korea's and the U.S.'s interest rates to up to 1 percentage point.

South Korea's central bank had already increased its benchmark rate to 3 percent in consecutive meetings in July and August, marking the first consecutive rate hikes since January 2023. Analysts believe that factors like rising inflation, a stronger Korean won, and high household debt will push the BOK to further raise its benchmark rate this year. The BOK is likely to announce the timing and pace of the hike in November, rather than in October, as it evaluates the impact of back-to-back rate increases.

The central bank's policy focus, as outlined in the minutes from the August monetary policy meeting, is on determining the timing and pace of rate hikes, rather than deciding whether to raise rates or not. The BOK's latest report on monetary policy stated that it will assess domestic and external conditions while deciding on further hikes, given the expectation of sustained acceleration in inflation and strong economic growth.

Robust economic growth, with the country's nominal GDP growing at its fastest pace in 47 years in the second quarter, driven by strong exports and investment in artificial intelligence, further supports the BOK's case for additional rate hikes. The growing interest rate gap, combined with high housing prices in Seoul and surrounding areas, will likely encourage the BOK to maintain a hawkish stance.