BOK expected to hike key rate by 25 basis points this week

The Bank of Korea (BOK) is anticipated to go for a 25-basispoint increase at this year’s final rate-setting meeting to strike a balance between inflation and the adverse effects of its accelerated credit tightening in 2022, according to analysts, Sunday.

Scheduled on Thursday, the meeting will come as the currency and stock markets here took a beating in general throughout the year over the U.S. Federal Reserve’s hawkish rate hikes to tame inflation.

The Fed’s rate policy led to a widening interest gap between Korea and the United States, and subsequently, raised concerns over capital flight in search of safe-haven assets.

While the BOK also carried out aggressive rate hikes to stabilize prices and the financial market, such hikes have been followed by unwelcome liquidity shortages suffered by companies due to costly borrowing rates.

Under the circumstances, the BOK was believed to be open to taking its third “big step” rate hike of 60 basis points following July and October, until it was found that U.S. inflation cooled down to an eight-month low of 7.7 percent last month.

The eased U.S. inflation number suggests the Fed’s hawkish credit tightening is paying off. It then has fostered optimism here that the U.S. central bank may not go for a fourth 75-basispoint rate hike as predicted in the final monetary policy meeting of 2022 that takes place on Dec. 12 and 13.

The U.S. interest rate remains in a range of 3.75 percent to 4 percent as compared to Korea’s 3 percent.

“Many speculate U.S. inflation may have peaked after it cooled down to 7.7 percent in October, raising hopes that the Fed will ease credit tightening in response,” LG Economic Research Institute economist Cho Young-moo said. “The BOK is expected to take the U.S. factors into account along with the refinancing burden of companies to balance out its monetary policy this week.”

He also said the gloomy 2023 economic outlook for Korea is a reason for the BOK to adjust its monetary policy.

According to LG Economic Research Institute, Korea’s economy will further slow to the mid-1percent level in 2023, down from the 2 percent range this year.

Joo Won, deputy director of the Hyundai Research Institute, voiced a similar view, noting the won-dollar exchange rate fell below the psychological threshold of 1,400 won after the U.S. inflation numbers were announced and has hovered in the 1,300 won range since then.