BOK Weighs May Rate Hike... Governor's First Monetary Policy Meeting Shows Support for Increase

Possibility of Continuous Increases Without Pause Amid US Tightening and Domestic High Inflation

Lee Chang-yong, the new Governor of the Bank of Korea, is meeting with reporters at the Bank of Korea briefing room on Sejong-daero, Jung-gu, Seoul, on the 25th. / Photo by Joint Press Corps

[Asia Economy Reporter Seo So-jung] As the high inflation shock continues, expectations are mounting that Lee Chang-yong, Governor of the Bank of Korea, will raise the base interest rate at the Monetary Policy Committee meeting he is presiding over for the first time since his inauguration.

According to the financial industry on the 3rd, with the April consumer price inflation rate far exceeding expectations, the possibility of a rate hike is emerging again at the Bank of Korea's Monetary Policy Committee meeting scheduled for the 26th of this month, following last month. Initially, the market largely anticipated a pause in May since this is Governor Lee's first MPC meeting and rate hikes had already been implemented in January and April this year.

However, the recent atmosphere has shifted rapidly. With the U.S. Federal Open Market Committee (FOMC) meeting held on the 3rd and 4th (local time) expected to implement a ‘big step’ of raising the base rate by 0.50 percentage points at once, and even the possibility of a ‘giant step’ of a 0.75 percentage point hike in June being raised, the outlook that additional hikes cannot be delayed is spreading quickly. The fact that the next MPC meeting is in July also adds pressure to respond promptly.

Experts are also focusing on the rapid inflation trend and emphasizing the need for a rate hike. Professor Kim Sang-bong of Hansung University’s Department of Economics said, "Although Korea raised rates preemptively compared to the U.S. last year, if the U.S. starts rapid rate hikes from May and even takes a giant step, the phenomenon of interest rate inversion in the second half of the year will become a reality," adding, "A rate hike in May is necessary." Professor Ha Jun-kyung of Hanyang University’s Department of Economics noted, "The consumer price inflation rate of 4.8% is a figure that can psychologically shock people," and predicted, "Since inflation expectations could expand significantly, the Bank of Korea may face increasing pressure to raise rates in May."

However, experts drew the line on the possibility of a 0.50 percentage point hike in May, which has been raised by some. Professor Ha said, "The Bank of Korea has never raised rates by 0.5 percentage points at once," adding, "If they do raise rates, it is more likely they will opt for a 0.25 percentage point increase followed by continuous messaging to curb inflation expectations." The preemptive rate hikes starting from August last year ahead of the U.S. were largely aimed at avoiding shocking the market by raising rates by 0.50 percentage points at once. Since rates were already raised by 0.25 percentage points last month, an additional hike this month would effectively have the impact of a big step, which is a factor that negatively views the 0.50 percentage point hike option.