BOK likely to take 50-bp big step hike to curb inflation

South Korea’s central bank is expected to raise interest rates by 50 basis points (bps) on Wednesday for the first time in history to cool down rampant inflation in Asia’s fourth-largest economy and support the ailing won currency amid expectations of aggressive US tightening.

The Bank of Korea is forecast to ramp up the base interest rate to 2.25%, last seen in August 2014, from 1.75%. Since the central bank began using a policy interest rate in 1999 it has never increased the rate by 50 bps.

It would also be the first time for the BOK to raise rates in three consecutive meetings as the monetary authority delivered a back-to-back interest rate hike in May.

Local bond market players including traders predicted the BOK would ramp up interest rates this week, a survey by Korea Financial Investment Association showed earlier this week, with 64% seeing a 50-bp hike.

HARD TO STABILIZE WITH ONE BABY STEP

The country’s consumer prices grew 6% in June from a year earlier, the fastest pace since November 1998 when the country was hit by the Asian financial crisis. Earlier this month, the central bank expected inflation to remain high for the time being, adding to expectations of a big step hike.

“It would be hard to stabilize inflation with one baby step as inflation could top the 6% level and inflation expectations are also quickly accelerating,” said Ha Joonkyung, an economics professor at Hanyang University, referring to a 25-bp hike. “The BOK is more likely to show its determination on fighting inflation with a big step to curb inflation expectations.”

The expected hike is unlikely to help South Korea maintain its interest rate premium over the US as the Federal Reserve signaled the possibility of a 75-bp rate hike at its two-day policy meeting that begins July 28, analysts in Seoul said.

Last month, the US central bank jacked up the target federal fund rate by 75 bps to a range between 1.5% and 1.75%.

“If the BOK's hike is just 25 bps, the won will weaken further, raising import prices and inflationary pressure more,” said Cho Young-moo, a research fellow at LG Economic Research Institute.

Write to Mi-Hyun Jo at mwise@hankyung.com
Jongwoo Cheon edited this article.