[Edaily Reporter Jang Young-eun, New York Correspondent Seong Joowon ] With the U.S. Federal Reserve (Fed) raising its benchmark interest rate for the first time in three years and two months and leaving the door open for further hikes, attention is turning to the Bank of Korea’s next interest rate decision. Although the Bank of Korea raised rates in both July and August, it is closely monitoring both the cost burdens resulting from high oil prices and inflationary pressures stemming from the semiconductor boom and the recovery in consumer spending. As the central bank must assess the effects of previous rate hikes while determining the timing and pace of further increases, the calculations surrounding monetary policy have become even more complex.

Concerns Over the Impact of Rising Energy Prices on Service Costs

On the 16th (local time)

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the Federal Reserve raised its benchmark interest rate by 0.25 percentage points to a range of 3.75%–4.00% per annum. The interest rate differential between Korea and the U.S., which the Bank of Korea had narrowed by raising the benchmark rate from 2.50% to 2.75% in July and to 3.00% in August, has widened again to 1 percentage point based on the upper limit of the U.S. range. However, the widening of the interest rate differential alone does not necessarily mean the won will weaken or that capital will flow out. The exchange rate is influenced not only by expectations of further U.S. rate hikes but also by exports and imports, foreign investment, and trends in international financial markets. Actual exchange rate movements are crucial for domestic inflation. This is because, when international oil prices rise and the value of the won falls at the same time, more won are needed to import the same amount of crude oil. When deciding on last month’s rate hike, the Bank of Korea emphasized the need for preemptive action, noting that growth was continuing at a higher-than-expected pace due to strong exports and a recovery in domestic demand, and that the inflation rate was expected to remain above the target level for a considerable period.
BOK Governor Shin Hyun-song emphasized the stabilizing effect of monetary policy on the exchange rate, stating, “When monetary policy anchors the foreign exchange market, it contributes to exchange rate stability.”
Monetary Policy Committee members also expressed concern about the impact of rising energy prices on the prices of other goods and services. At the August Monetary Policy Committee meeting, while the consumer price index (CPI) for July had declined to 2.8%, the core CPI—excluding food and energy—rose to 2.6% due to factors such as higher prices for personal services and durable goods. Rising oil prices affect not only gas station prices but also corporate production and transportation costs. The extent and duration of inflation depend on the extent to which companies pass on these increased costs to their selling prices. This is why MPC members pointed out that indirect effects may persist even after the direct impact of energy prices subsides.
The domestic economy and income trends are also key variables in the Bank of Korea’s assessment. Thanks to the semiconductor boom, domestic exports and investment are increasing, and income conditions are improving as terms of trade—the price ratio between exports and imports—have improved. The Bank of Korea is monitoring the extent to which rising incomes are driving up prices through increased consumption.

Prices, the Economy, Debt, and Housing Prices Must Be Considered Together

In August, the Bank of Korea raised its growth forecast for this year from 2.6% to 3.3% and for next year from 2.1% to 2.9%. It also revised upward its core inflation rate forecasts for this year and next to 2.5% each, up from the previous estimates of 2.4% and 2.3%. With growth outpacing expectations due to a recovery in exports and domestic demand, the central bank anticipates that the inflation rate will also exceed the 2% target. However, strong export performance does not necessarily mean that conditions have improved across all industries and for all households. It is necessary to distinguish how much of the income growth—driven primarily by the semiconductor sector—is trickling down to other industries and consumer spending, and to identify which sectors are facing strain due to rising interest rates.
The United States has also raised its inflation forecast alongside improved economic and employment outlooks. Amid a strong economy and robust employment, inflation has not come down sufficiently, prompting another interest rate hike. Both South Korea and the U.S. are now in a position to prioritize price stability, backed by robust economies. Federal Reserve Chair Kevin Warsh emphasized price stability, stating, “Inflation has been too high for too long.” The median forecast for the benchmark interest rate six months from now, as presented by Monetary Policy Committee members in August, was 3.25 percent—0.25 percentage points higher than the current rate. Governor Shin stated, “The future stance of monetary policy is implied in the dot plot.”
Along with inflation and economic conditions, the Bank of Korea must also monitor financial stability factors such as household debt and housing prices. This is because prolonged high interest rates place a burden on both households and businesses. If government bond yields and expectations of further rate hikes push up market interest rates, loan rates and corporate funding costs will also rise. If bank bond yields rise, banks’ funding costs will increase, which could also affect the rates on new fixed-rate and hybrid mortgage loans. For variable-rate loans, the timing of adjustments varies depending on agreed-upon benchmarks—such as the COFIX (an index reflecting banks’ funding costs)—and adjustment cycles. For corporations, interest rates on new borrowings and maturity extensions are more important than those on existing fixed-rate debt. Since the Bank of Korea must assess both these financial conditions and inflation trends when deciding on further rate hikes, the pressures surrounding monetary policy are growing even more.