Central Bank Under Pressure to Hike Interest Again

The U.S. Federal Reserve raised the key interest rate by a smaller margin of 0.25 percentage point on Wednesday. But that still increases pressure on the Bank of Korea to hike interest rates here at its next rate-setting meeting on Feb. 23.

According to Statistics Korea on Thursday, consumer prices have soared 5.2 percent from a year ago, rising again for the first time in three months. After peaking at 6.3 percent in July of last year, inflation fell to five percent in December.

Electricity, gas and water rates surged 28.3 percent from a year ago to a record high.

The gap in interest rates between the two countries is another factor. It already stands at the widest in 22 years after the BOK hiked the base rate by a quarter percentage point in January.

Normally Korea has been slightly ahead of the U.S. in order to prevent a capital outflow, but now the U.S. rate is a full 1.25 percentage points higher. If this continues, investors could exit the Korean market in search of higher yields and devalue the won as they dump it to buy dollars.

That also causes import prices to rise and stokes inflation, resulting in a deteriorating trade balance for Korea.

So far there have been no signs of a capital flight since the U.S. overtook Korea in July last year, prompting some analysts to say there is no rush to hike interest rates. Along with concerns of an economic slowdown, the country is saddled with W1.9 quadrillion in household debt, which also make it difficult for the BOK to hike interest rates (US$1=W1,220).

Last month, the BOK boosted the base rate to 3.5 percent. Three out of six monetary committee members said there is no need to hike further, but it remains to be seen if they will stand firm.