Fed policy puts Korea under pressure to hike rate again

• Published date: 08 March 2023
• Publication title: The Korea Times

The Bank of Korea (BOK) has come under increasing pressure to hike the key rate again by 25 basis points next month, in a move to ease market turbulence amid the U.S. Federal Reserve's unwavering hawkish bias.

After Fed Chair Jerome Powell sent unexpectedly aggressive signals for additional rate hikes overnight, the outlook of the BOK taking another baby step has gotten clearer on growing concerns over the widening interest rate gap between the two countries.

This shattered the once-prevalent prediction that the ultimate level of Korea's key rate will be set at the current 3.5 percent. Even if Korea's consumer prices are showing signs of stabilization after falling to the 4 percent range increase in February for the first time in 10 months, the Fed's reviving hawkish rhetoric comes as a bigger burden to the BOK's rate decision, according to economists.

A market consensus is that the Fed will raise its benchmark rate by 50 basis points to a range of 5 percent to 5.25 percent during the upcoming rate-setting meeting this month. This will expand the key rate gap between the BOK and the Fed to 1.75 percentage points. This is the largest in 23 years since the figure reached 1.5 percentage points between May and October 2000.

Economists also expected the BOK to take another baby step in April on the longer-than-expected cycle of the Fed's monetary tightening.

"Another rate hike of the BOK seems to be in sight, as the Fed is displaying signs of extending its monetary tightening cycle with a more hawkish tone," said Kang Hyun-ju, an economist at the Korea Capital Market Institute. "The BOK will take comprehensive factors into account, such as the movement of the won-dollar exchange rate."

"BOK Governor Rhee Chang-yong also left open the possibility of the scenario, but it appears premature for the time being to predict the ultimate level of the key rate, as the economy here is...