Bank of Korea Gov. Rhee Chang-yong attends a ceremony at a Seoul's hotel, Jan. 3. Yonhap

The Bank of Korea (BOK) is widely expected to raise its benchmark interest rate at least by a quarter percentage point later this week amid worries over persistently-high inflation, market observers said Monday.

They also predicted the BOK will seek additional increases in the months to come but remained divided over how high the rate could rise in the face of growing worries over economic recession.

The BOK is set to hold this year's first rate-setting monetary policy meeting Friday. A rate increase would mark the seventh straight hike since April last year and come after a 0.25 percentage hike delivered at the last meeting of 2022 in November.

Another quarter-point hike would also represent the tenth increase of a combined 3 percentage points since August 2021, when the BOK began tightening to "normalize" the ultra-low rate to fight fast-rising inflation pressure. The rate currently stands at 3.25 percent.

"With inflation still remaining high, the BOK is likely to maintain monetary policy centered on inflation," Nomura Securities economist Park Jeong-woo said. "Chances are high that (the BOK) will deliver a 0.25 percentage rate increase."

Inflation pressure appears to have been moderating recently thanks in part to a fall in crude oil prices, but the BOK remains cautious against the trajectory of price growth.

In December, the country's consumer prices, a major gauge of inflation, rose 5 percent on-year, sharply slowing from a 6.3 percent spike in July, the fastest rise since November 1998. It remains quite higher than the BOK's medium target range of 2 percent.

In a report released in late December, the BOK predicted inflation pressure will likely moderate "steadily" this year but prices could grow at around 5 percent "for the time being."

BOK Gov. Rhee Chang-yong reiterated concerns over inflation in his New Year's Day message, in which he said the priority of the central bank's monetary policy will stick to price stability going forward.

This Dec. 26, 2022 file photo shows a sign about a bank's loan program that was put up on the exterior of a lender in Seoul. Yonhap

Another major factor that could mount pressure for the BOK to keep tightening is a widening rate difference with the United States, as the Federal Reserve is likely to continue its aggressive monetary stance and cool down its economy until inflation eases.

The Fed raised the federal funds rate by 0.5 percentage point again to a range of 4.25 percent to 4.50 percent in December, widening the deferential between Korea and the U.S. to 1.25 percentage points. The difference marked the largest since October 2000, when it grew to 1.5 percentage points.

Higher rates in the U.S. through such a rate reversal could prompt money outflows from Korea as investors pursue higher returns, a phenomenon that could weaken the local currency and amplify inflation pressure by making imports more expensive.

The gap could increase further, as the Fed has said it would maintain its hawkish monetary stance until inflation eases.

"The Fed hiked the rate in December and is expected to announce yet another increase in early February," Joo Won, a senior researcher at Hyundai Research Institute, said. "The BOK will likely lift its rate by 0.25 percentage point in January (this week) and then take a wait-and-see stance until the FOMC meeting in February."

The seemingly endless and breathtaking pace of rate hikes, however, cannot continue forever.

Experts are cautiously predicting the BOK will end more than a year of rate hikes either later this year or early next year, as it will not be able to turn a blind eye to growing recession woes.

Korea's economy is facing growing risks of slowing down with exports, a major driver of growth, on the decline for months. Consumption and corporate investment are also under strain from the tumbling real estate market and high borrowing costs due to the central bank's monetary tightening.

BOK Gov. Rhee hinted the terminal interest rate will likely to rise to as high as 3.5 percent, but some market observers say it could be higher than that in consideration of the Fed's hawkish stance.

"Considering economic situations, it would be a little burdensome for the BOK to seek a rate hike for the second straight month in February. Chances are the BOK could lift the rate by another 0.25 percentage point in April," Cho Young-moo, a researcher at LG Economic Research Institute, said.

In an apparent recognition of toughening conditions for the economy, Rhee earlier said he will closely cooperate with the government and other relevant agencies to engineer an economic "soft landing."

"The BOK, along with the government, will do its utmost in drawing up precise measures in a way that they will contribute to engineering a soft landing of the Korean economy at a time when uncertainty is so high that visibility is cloudy," the top central banker said in a meeting with financial leaders in Seoul last week.

"We will maintain monetary policy with a focus on price stability but at the same time take note of changes in conditions in the economy, and financial and foreign exchange markets as well," he added. "If necessary, we will actively take market stabilization measures, and closely communicate and cooperate with relative authorities." (Yonhap)