BOK takes 25-bp rate hike as won rebounds against dollar

South Korea’s central bank raised the base interest rate by 25 basis points to 3.25% during its monetary policy board meeting on Nov. 24, slowing the pace of rate increase compared with 50 bps in October. The bank forecast the gross domestic product (GDP) growth rate for the next year to be 1.7%, lower than its previous forecast of 2.1%.

Through the sixth rate hike of this year, Korea’s policy interest rate hit the highest in more than a decade since July 2012, when the rate also reached 3.25%. The gap between Korean and US policy interest rates narrowed to 75 bps.

The Bank of Korea is understood to have avoided another big step hike as the won has recently rebounded and the US Federal Reserve is expected to slow its pace of tightening. With a combined 5.1% increase so far this month, the Korean currency started trading at 1,337.5 per dollar and closed at 1,328.2 in the domestic market on Thursday.

The Fed hinted at a slowing pace of aggressive rate hikes in the Federal Open Market Committee (FOMC) meeting Nov. 1-2, the minutes of which were released on Nov. 23.  

“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability,” the committee said in the minutes.

The comments are understood to raise the possibility that the Fed will take a big step of 50 bps, not a giant step of 75 bps, in December.

The Bank of Korea has taken a smaller step due to increasing woes over the global economic downturn, market watchers said. The Bank of England said it predicts a prolonged recession with challenges early this month. The Fed also said in the November minutes that it viewed the possibility that the economy would enter a recession sometime over the next year.

The further risks of an illiquidity crisis in the local bond market, caused by the Legoland theme park developer’s debt default, also led to the Bank of Korea’s slower pace in the rate increase.   

On the GDP of the next year, the Korean central bank lowered the growth rate to 1.7%, citing more sluggish exports and investment than expected along with a moderate recovery in consumption. 

The bank projected consumer price inflation to be 5.1% this year and 3.6% next year, slightly below the August forecast of 5.2% and 3.7%, for the same periods. Uncertainties are highly related to the movements of exchange rates and global oil prices, the degree of economic slowdown at home and abroad as well as electricity and gas increases, the bank said.

Write to Mi-Hyun Jo at mwise@hankyung.com
Jihyun Kim edited this article.