It is expected that the Bank of Korea will raise the base rate again tomorrow (26th) by 0.25 percentage points (p) and significantly raise the consumer price inflation forecast for this year to the 4% level.



Most financial and economists analyze that the key rate hike is inevitable for two months in a row, although it is unusual considering the rate of increase in consumer prices that threatens the 5% range and the accelerated pace of monetary tightening in the US.



At the Monetary Policy Direction Meeting held on the 14th of last month before Lee Chang-yong took office as Governor, the Monetary Policy Committee raised the base interest rate by 0.25 percentage points (1.25 → 1.50%) with the unanimous consent of six members.



If another 0.25 percentage point increase is decided at tomorrow's meeting, it would be the first rate increase in 14 years and 9 months following July and August 2007 for two months in a row.



Today, the financial investment industry and experts are focusing on the one-month increase because the inflationary pressure is so severe.



In April, the CPI jumped 4.8% from the same month last year due to a surge in international energy prices and disruptions in the supply chain.



It is the highest record in 13 years and 6 months since October 2008 (4.8%).



Not only the immediate rise in prices, but also the strong expectation of inflation among economic agents is a problem.



According to the results of the BOK consumer trend survey, the expected inflation rate in May was 3.3%, the highest in 9 years and 7 months since October 2012 (3.3%).



Park Jung-woo, an economist at Nomura Securities, said, "The Monetary Policy Committee will raise the key interest rate by 0.25 percentage points to preemptively respond to growing inflationary pressures. The increase will be inevitable because there are factors that stimulate inflation, such as an increase in demand for retaliatory consumption and the execution of an additional budget (additional budget).”



The possibility of an inversion of the Korea-US base rate following an additional big step in the US (a 0.5 percentage point increase in the base rate at once) is also a major basis for the prospect of a base rate hike.



At the Federal Open Market Committee (FOMC) regular meeting held on the 3rd and 4th (local time) on the 3rd and 4th (local time), the US Federal Reserve took a big step for the first time in 22 years to increase the target range of the policy rate (base rate) from 0.25 to 0.50. % increased from 0.75 to 1.00%.



As a result, the base rate gap between Korea (1.50%) and the US (0.75-1.00%) has significantly decreased from 1.00 to 1.25 percentage points to 0.50 to 0.75 percentage points.



Assuming that there is no change in Korea's base rate, the difference in interest rates between the two countries will almost disappear with just the second big step in the US within the next few months, and the US base rate may reverse to a higher state with the third big step.



In the case of the won, which is not a key currency such as the dollar (basic currency for international settlements and financial transactions), even if the base interest rate level exceeds the US, if the difference is not large, foreign investors' capital outflows and a sharp decline in the value of the won may occur.



Moreover, if the US base rate rises higher than Korea's, the possibility of foreign funds flowing out and the won/dollar exchange rate sharply rises, which in turn increases the possibility of inflation.



The BOK will also release a revised economic outlook tomorrow when the Monetary Policy Committee meeting is held.



In general, experts expected the BOK to raise its forecast for consumer price inflation this year from 3.1% to 4%.



The final forecast for the BOK's 4% annual consumer price inflation rate is July 2011 (4.0% annual forecast), and attention is paid to whether the 4% level will reappear after 10 years and 10 months.



Economist Park said, “The forecast for the consumer price inflation rate will rise significantly from the previous 3.1% to around 4.3%.



The consensus of experts is that this year's real gross domestic product (GDP) growth rate is highly likely to be revised downward from 3.0% to the mid-to-late 2% range.