BOK Hikes Interest Rates for 4th Time

The Bank of Korea on Thursday hiked the base interest rate by another quarter percentage point to 2.5 percent.

This is the fourth hike after April, May and July. The move is intended to tame runaway inflation, which has soared to over six percent, and halt the devaluation of the Korean won amid drastic rate hikes in the U.S.

All seven members of the BOK's monetary policy committee supported the increase.

After maintaining the key rate at an ultra-low 0.5 percent during the coronavirus pandemic, the BOK raised the rate by two percentage points since August of last year. This is the first time in eight years it has risen to 2.5 percent.

BOK Governor Rhee Chang-yong told reporters, "It is necessary to continue to raise interest rates in order to suppress inflation and prevent high consumer prices from becoming entrenched."

The BOK revised its economic growth forecast for Korea this year and raised its inflationary projection from 4.5 percent to 5.2 percent, the highest since 1998's 7.5 percent at the height of the Asian financial crisis.

"Consumer price growth of five to six percent will continue until early next year as global energy price uncertainties remain high due to the war in Ukraine."

Rhee said his plan to increase the key rate by 25 basis points at a time "remains valid" since the economic situation is not drastically different from July. That means the BOK is likely to raise the key rate by another quarter percentage point in October and November. At that pace, it will rise to three percent within this year.

Korea has now pulled level with the U.S., but that is expected to change in a month when the Fed is expected hike the base rate by another 75 basis points.

Rhee tried to assuage concerns that the won will keep plummeting against the dollar. "There are concerns that the latest weakening of the won implies problems with Korea's sovereign credit rating or liquidity, which could lead to a repeat of the (Asian financial crisis) or 2008 (global financial crisis). But things are different this time," he said.