BOK to Follow U.S.' Drastic Interest Hike

Bank of Korea Governor Rhee Chang-yong on Thursday hinted that the central bank will hike interest rates by an unprecedented half percentage point to pull ahead of the U.S.

"We will make a decision after monitoring market trends" in a monetary policy meeting next month, he told reporters.

The U.S. Federal Reserve hiked the benchmark interest rate by 0.75 percentage point on Wednesday, the biggest increase since 1994. That means the key interest rates of Korea and the U.S. have become virtually equal, and the received wisdom is that Korea needs to stay slightly ahead.

"It is true that the pace of interest rate hikes in the U.S. is faster than ours," Rhee said. "But rather than just focusing on the gap, we will make a comprehensive decision based on the impact on the foreign exchange and bond markets."

The danger is that the U.S. interest rate could rise above Korea's next month. Even if the BOK hikes the rate by 0.5 percentage point in July, the Fed could increase it by another 0.75 percentage points, which would lead to an exodus of foreign capital from Korea.

When asked if he considered holding an ad-hoc monetary policy meeting to raise the base rate straight away, Rhee said, "I haven't considered that so far."

Market forecasts are mixed. Goldman Sachs expects the BOK to hike the base rate by a steady quarter percentage point in the four remaining monetary policy meetings this year, but JP Morgan forecast the BOK to take a big leap in July and another quarter percentage point three more times this year.

Goldman Sachs forecast Korea's base interest rate at 2.75 percent by the end of this year and JP Morgan at three percent.