In the end, the Bank of Korea took another 'big step' (a 0.50 percentage point increase in the base interest rate) after three months since July in order to keep pace with the rising inflation and exchange rate.



The Bank of Korea Monetary Policy Committee (hereinafter referred to as the Monetary Policy Committee) raised the base interest rate from 2.50% per annum to 3.00% by 0.50 percentage points at the Monetary Policy Direction meeting held today (12th) at 9 am.



The 3% base rate is the first in 10 years since October 2012, and the five consecutive hikes following April, May, July and August are also the first in the history of the BOK.



Earlier, on March 16, 2020, the MPC launched a so-called 'big cut' (1.25 → 0.75%) to lower the base rate by 0.50 percentage points at a time when an economic recession was expected due to the impact of Corona 19, and on May 28 of the same year, an additional cut ( 0.75 → 0.50%), which quickly cut interest rates by 0.75 percentage points in two months.



After a whopping nine freezes, on August 26 last year, it finally raised 0.25 percentage points for the first time in 15 months, signaling the start of the so-called 'monetary policy normalization'.



Since then, the base rate has risen by 0.25 percentage points six times, 0.50 percentage points twice, all 2.50 percentage points between November of the same year, January, April, May, July and August of this year, and for about one year and two months until today.



The MPC took the second big step today after breaking the forward guidance (pre-announcement guideline) saying, "It will gradually increase by 0.25 percentage points for the time being."



The consumer price index (108.93) in September rose 5.6% from the same month last year.



The increase rate fell for the second month in a row following August (5.7%), but it does not drop significantly from the mid-5% range.



The expected inflation rate (the general public), which corresponds to the inflation forecast for the next year, also fell to 4.2% in September for the second month in a row, but has maintained the 4% level for three months in a row since the all-time high of 4.7% in July.



Earlier at the Monetary Policy Committee meeting, Joo Won, head of economic research at Hyundai Research Institute, said, "I think the probability of a big step is higher as the consumer price inflation rate in September fell less than expected."



Cho Young-moo, a research fellow at LG Business Research Institute, also said, "Even if the inflation rate reaches its peak in the fall, the Bank of Korea and others do not expect it to drop significantly after that. "I expected.



The widening of the base interest rate gap between Korea and the United States and the risk of further increases in exchange rates and prices are also cited as the main factors behind the decision to make a big step.



Until just before the Big Step, the gap between the base rate (policy rate) between Korea (2.50%) and the US (3.00-3.25%) was up to 0.75 percentage points.



If the MPC took only a baby step (0.25 percentage point increase) today, if the Fed takes the fourth giant step as expected in early November, the difference in interest rates between the two countries will increase by 1.25 percentage points (US 3.75-4.00%, Korea 2.75%). could grow up to



The 1.25 percentage point is close to the largest rate inversion in history (1.50 percentage points at the time of the reversal between June 1996 and March 2001). rising) means the chances are greater than ever before.



If the exchange rate rises further as the interest rate gap between the US and Korea widens, inflation, which is going through a difficult peak, could be shaken up again.



This is because as the value of the won decreases, the won equivalent price of the same imported product rises.



Ahn Ye-ha, a researcher at Kiwoom Securities, predicted a big step and said, "The BOK will not let the interest rate gap between the US and Korea continue to widen, given that the Fed raised interest rates at a rapid pace in September and predicted that it will do so in November."



Ha Jun-kyung, a professor of economics at Hanyang University, also said, "It is time to raise interest rates by 0.50 percentage points enough to keep the exchange rate." and diagnosed.



As the MPC raised the base rate by 0.50 percentage points today, the gap with the US has narrowed to 0.00-0.25 percentage points.



However, if the Fed takes the fourth giant step in a row early next month, the gap is expected to widen again soon to 0.75 to 1.00 percentage points.



(Photo = Yonhap News)