BOK Governor: Gradual increase of key rate would be appropriate

The Bank of Korea (BOK) Governor Rhee Chang-yong stated that it would be appropriate to gradually raise the benchmark interest rate by a quarter percentage point.

“As the inflation will continue its upward trend for some time, we should keep our stance of raising the key rate,” said Rhee in the National Assembly’s Strategy and Finance Committee on Monday. “If the trend of inflation and economic growth do not stray far from our initial outlook, it would be appropriate for us to raise the rate in phases by 0.25 percentage points.” His remarks can be interpreted that even though the U.S. has been speeding up its pace of monetary tightening, he doesn’t see the necessity for the country to confront by ‘big step (raising the benchmark rate by 0.5 percentage point).’ However, when asked about the possibility of a ‘big step’ rate increase, Governor Lee said, “The possibility cannot be ruled out. Decisions will be made based on the data when the country comes out of inflation,” leaving the door open.

Rhee’s comments on the day have reconfirm‎ed the BOK’s initial policy of gradually raising the interest rate. On July 13 when the central bank took its first ‘big step,’ Rhee mentioned that the rate will go up by 0.25 percentage points in the press conference for a while. Assuming that the BOK will raise the base rate by 0.25 percentage point two or three times at the remaining three rounds of the Monetary Policy Committee this year, the rate will go up from 2.25 percent to 2.75-3.0 percent at the end of the year. However, the U.S. is giving notice of another ‘giant step (a 0.75 percentage point increase)’ or ‘big step’ this year from the current base rate of 2.25-2.50 percent within this year. In that case, the ‘rate reversal,’ where the U.S. benchmark rate becomes higher than that of Korea, is likely to prolong.

The BOK governor excluded the possibility of stagflation in the nation’s economy, a period when slow economic growth coincides with rising inflation. “The economic situation didn’t grow worse, with the growth rate in the second quarter at 0.7 percent, higher than our projection of 0.3 percent,” Rhee added. “So, it might be difficult to exactly say that we are in stagflation.”


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