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

SEOUL, Sept. 17 (Yonhap) -- The Bank of Korea is expecting increasing calls to raise its benchmark interest rate following the U.S. Federal Reserve's first increase in over three years to combat inflation, according to financial watchers. On Wednesday, the Fed raised its benchmark interest rate by a quarter percentage point to the 3.75-4.00 percent range, indicating the likelihood of further hikes this year due to persistent inflation and high oil prices. This move widened the gap between South Korean and U.S. interest rates to up to 1 percentage point.

South Korea's central bank had raised its benchmark rate to 3 percent in two consecutive meetings in July and August, marking the first consecutive rate hikes since January 2023. Analysts believe rising inflation, a stronger currency, and high household debt in the country will push the Bank of Korea (BOK) to raise its benchmark rate again this year.

At a meeting on Thursday, BOK Senior Deputy Governor Kwon Min-soo reviewed the potential impact of the U.S. interest rate policy on domestic financial and foreign exchange markets. He noted that the Federal Reserve is likely to maintain its tightening stance, with Fed Chair Kevin Warsh hinting at another rate hike. Kwon also mentioned that risks remain due to the Middle East situation, concerns over major economies' fiscal health, and uncertainties in the artificial intelligence sector.

The BOK will keep a close watch on domestic and foreign exchange markets, as well as major economies like Japan and Britain, which are also set to decide their key interest rates this week.

The BOK is likely to raise the key rate in November, rather than next month, as it assesses the impacts of back-to-back rate hikes, according to Kim Myung-sil, an analyst at iM Securities. The central bank's policy focus is on the timing and pace of rate hikes, rather than whether to raise them, according to the minutes from the August monetary policy meeting.

In its latest report on monetary policy, the BOK stated that it will decide the timing and pace of further rate hikes while monitoring domestic and external conditions, as accelerating inflation and solid economic growth are expected to persist for some time. The country's strong economic growth, driven by robust exports and AI-related investments, further supports the need for an additional rate hike, according to experts.