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Bank of Korea (BOK) Governor Rhee Chang-yong speaks during a press briefing on price policy at the BOK headquarters in central Seoul, Tuesday. Yonhap

By Yi Whan-woo

The Bank of Korea (BOK) has hinted that it will carry out more key interest rate hikes next year as it plans to place a policy priority on fighting inflation over boosting growth.

In its report on the directions of its 2023 monetary policy released Friday, the central bank said it will stick to the principle of the current monetary policy to stabilize prices and meet the target inflation rate of 2 percent.

"Inflation next year may be lower than this year's due to the growth slowdown and base effect concerning the supply side, but it is still expected to grow at the mid-3-percent level as price pressure will mount on electricity, gas and basic necessities," the report read in relation to the 2023 monetary and credit policy directions.

The central bank was referring to its 2023 inflation outlook of 3.6 percent, compared to 5.1 percent in 2022.

It said the base rate will be determined ultimately by considering price trends along with the economic situation and financial markets.

Market analysts expect that the BOK may raise the key interest rate higher than the much-anticipated peak rate of 3.5 percent from the current 3.25 percent, as it appears to be geared toward stabilizing inflation more than tackling the growth slowdown in 2023.

Kim Wan-joong, the chief economist at Hana Financial Group's think tank, said the base rate could be hiked up to 3.75 percent.

"Whether the BOK can settle with a 3.5-percent base rate is not certain, as inflation as well as monetary policy can be influenced by outside factors," Kim said.

In particular, Kim noted that the U.S. Federal Reserve's median forecast in mid-December showed that it is open to raising its policy rate to as high as 5.1 percent after delivering a 50-basis-point hike to raise the base rate to the range of between 4.25 percent to 4.5 percent.

The median forecast was revealed after the BOK viewed 3.5 percent to be appropriate for the peak rate.

The BOK is under pressure to hike the interest rate if the gap between Korea and the U.S. widens too much, because it can result in an outflow of cash in search of safe haven assets.

Speaking on condition of anonymity, an economist at a private research institution voiced a similar view with that of Kim.

"The BOK may deliver a 25-basis-point hike twice in the first quarter of 2023, which will increase the base rate from the current 3.25 percent to 3.75 percent," the researcher said.

He added, "The two hikes within the first three months of next year, rather than a longer interval in between, will be effective to cope with the Fed's rate policy and make sure the interest rate gap between the two countries does not widen too much and negatively affect Korean economy."

While the central bank's policy direction has been considered right on track, balancing between growth and inflation has become increasingly important amid multiple outlooks here and abroad that Korea's economic growth will slow down from this year's 2-percent range to the 1-percent range next year.

The BOK forecasts growth for 2023 at 1.7 percent, as compared 2022's 2.6 percent.

Korea achieved 1-percent-range growth or lower during only four past crises: 1980 in the aftermath of the second oil crisis, 1998 in the midst of the Asian financial crisis, 2009 in the midst of the global financial crisis and in 2020 due to the COVID-19 pandemic.