Korea Faces Another Interest Rate Hike

The U.S. Fed's decision to raise the key interest rate by 0.5 percentage points has increased chances of the Bank of Korea following suit.

Inflation is rising, and financial authorities are having to defend the Korean won against weakening further against the U.S. dollar. Interest rates in Korea must remain above the U.S. to prevent an exodus of foreign capital.

That means the BOK is highly likely to raise the key rate for the second month in a row for the first time in 15 years when its Monetary Policy Committee meets on May 26.

The BOK preempted the Fed by hiking the rate four times between August 2021 and last month from 0.5 percent to 1.5 percent, while the Fed's rate increase pushed its federal-funds rate to a target range between 0.75 percent to 1 percent.

Inflation in Korea has surged to the highest level in almost 14 years. BOK Governor Rhee Chang-yong, who will be convening his first monetary policy meeting, said recently that consumer prices are "worrisome."

But an additional interest hike could crimp the economy. Household debt has reached a staggering W1.86 quadrillion as of the end of last year, and raising interest rates would compound the burden on households as well as businesses, which could cut back further on hiring (US$1=W1,265).