Taming Inflation's 'Urgent Fire'... 0.25% Point Interest Rate Hike Without Governor (Comprehensive)

Base Interest Rate Raised from 1.25% to 1.50%

[Asia Economy Reporter Seo So-jung] On the 14th, the Bank of Korea's Monetary Policy Committee (MPC) decided to raise the base interest rate by 0.25 percentage points despite the absence of a governor, reflecting the urgency of price stability as a pressing issue. Initially, the lack of a governor was seen as a factor favoring a rate hike in May, but with the recent acceleration of the U.S. Federal Reserve's (Fed) tightening measures and warning signs in economic indicators, concerns grew that a delay could lead to a missed opportunity.

On the 14th, the MPC was chaired by Monetary Policy Committee member Joo Sang-young, acting as interim chair, as Lee Chang-yong, the nominee for the Bank of Korea governor, had not yet taken office. Although the unprecedented situation of six MPC members deciding the base rate without a governor was a variable in the decision, the committee ultimately agreed on a rate hike based on a shared assessment of the serious inflation situation.

The main factor behind this decision was soaring inflation. The consumer price index (CPI) in March surged by 4.1%, marking the first time in over a decade that the inflation rate exceeded 4%, creating a sense of crisis within the MPC that the inflation situation could not be ignored. The cumulative consumer price inflation rate up to March this year already stands at 3.8%. On the 5th, the Bank of Korea held a 'Price Situation Review Meeting' and analyzed that the consumer price inflation rate would likely remain above 4% for the time being. According to the Bank of Korea's March Consumer Sentiment Survey, the expected inflation rate reached 2.9%, the highest in 7 years and 11 months. Lee Chang-yong, the governor nominee, also expressed concern, stating, "This year's consumer price inflation rate seems likely to exceed the Bank of Korea's forecast of 3.1%."

The Fed's aggressive tightening stance also increased the pressure. According to the U.S. Department of Labor, the U.S. consumer price index (CPI) in March rose sharply by 8.5% compared to the same month last year, marking the largest increase since December 1981. Amid the highest inflation in 40 years in the U.S., Fed officials have repeatedly emphasized the need to quickly raise the base interest rate to a neutral level. Lael Brainard, nominated as Vice Chair of the Fed, also reiterated the necessity of tightening, stating, "Inflation levels remain high."

An interest rate inversion between South Korea and the U.S. could become a reality. If the U.S. proceeds with a 'big step' of raising the base rate by 0.5 percentage points at once in May, the current situation where South Korea's rate is higher by 0.75 to 1.00 percentage points could be reversed within a few months. This could lead to capital outflows by foreign investors and a depreciation of the Korean won. Professor Kim Sang-bong of Hansung University's Department of Economics commented, "Considering the domestic inflation situation, there was a judgment that interest rates needed to be raised," adding, "The U.S.'s tightening stance and persistent high domestic inflation were the background for deciding on a rate hike despite the absence of a governor."

It is also analyzed that the new government's prioritization of stabilizing livelihoods, including inflation, played a role in the decision to raise rates. President-elect Yoon Seok-youl instructed the Presidential Transition Committee on the 6th to "make stabilization measures for livelihoods, including inflation, the top priority of the new government."

Going forward, market attention will focus on whether the MPC will implement additional rate hikes at the upcoming May meeting. Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "The market initially expected one rate hike between the April and May MPC meetings, but with the recent strong indication of a big step by the U.S. Fed, the possibility of an additional hike in May cannot be completely ruled out." Regarding the decision to raise rates amid the absence of a governor, a Bank of Korea official stated, "We believe that deciding on a rate hike despite the governor vacancy demonstrates the independence and stature of the MPC as a collegial body."