Bank of Korea (BOK) Governor Rhee Chang-yong delivers an address during a New Year's meeting with financial industry leaders at Lotte Hotel in downtown Seoul, Jan. 3. Yonhap

Key interest rate most likely to settle at 3.5%

By Yi Whan-woo

The Bank of Korea (BOK) is likely to deliver its seventh straight rate hike in this year's first rate-setting meeting scheduled for Friday, as inflation remains high and has room to rise higher due to planned hikes on utility costs, according to analysts, Tuesday.

They said the BOK will also need to ensure the interest rate gap with the United States does not widen by too much, at a time when the U.S. Federal Reserve is poised to raise its policy rate to as high as 5.1 percent this year.

The borrowing rate of the U.S. stands in the range of 4.25 percent to 4.5 percent, which is significantly higher than Korea's at 3.25 percent.

Concerning the pace of hikes, the experts said the BOK will deliver a conventional 25-basis-point hike as compared to a much-anticipated 50-basis-point hike by the Fed in its rate-setting meeting scheduled for Jan. 31 to Feb. 1.

Recently, however, there has been heightened expectation that the Fed will take the baby step of raising the key rate by 0.25 percentage point instead of 0.5 percentage point, on positive signs in the job market and falling inflation expectations in the U.S.

Previously, Korea and the U.S. carried out rate hikes on Nov. 24 and Dec. 14, respectively


"Inflation is on a downward trend but it still can be adversely affected by prices of electricity and gas, among other utilities," Hyundai Motor Securities economist Oh Chang-sup said.

Kang Seung-won, an analyst at NH Investment & Securities, voiced a similar view. "Consumer price inflation is still high ― in the 5 percent range ― and the key interest rate is likely to be raised to 3.5 percent," he said.

The government announced a plan recently to increase the electricity rate by 9.5 percent quarter-on-quarter in the first three months of 2023, marking the steepest rise since the second oil shock in the 1980s when the quarterly price surges averaged 14.7 percent.

While it will not increase the gas price in the first quarter, the government plans for such an increase in the second quarter.

The prices of electricity, gas and water combined accounted for 0.41 percent of the 5.1 percent inflation for the entirety of 2022. The BOK's target range for that year was of 2 percent.

The planned hike of those prices accordingly can put upward pressure on inflation which is forecast to come down to the 3 percent range in 2023.

Asked how high the BOK rate will go up, most analysts said it should settle at 3.5 percent.

They noted the Korean won has been gaining ground against the U.S. dollar in recent weeks despite the widening interest gap between the two countries. Such a gap normally heightens fears over an outflow of foreign capital in search of safe haven assets and results in a fall in the value of the Korean currency against the dollar.

The won-dollar rate fell to a seven-month low of 1,240 won level per dollar, Monday, after soaring above 1,400 last year.

On Tuesday, the won-dollar rate closed at 1,244.7 won, up 1.2 won from the previous day's close.

Kim Sang-hoon, an analyst at Hana Securities, viewed that housing prices falling due to costly borrowing rates is another possible reason for the base rate to settle at 3.5 percent.

A possible 25-basis-point hike would represent the 10th increase by a combined 3 percentage points since August 2021, as well as the seventh straight increase since April 2022. Some of the seven rate hikes were by as much as half a percentage point.