Interest Rate Gap with the U.S. Widens to 1% point
The U.S. Federal Open Market Committee has raised the federal funds rate by 75 basis points, to a range of 3.75% to 4%. The interest rate gap between the United States and South Korea has widened to 1 percentage point and the Bank of Korea is in a serious dilemma with its last key rate decision for this year scheduled for Nov. 24.
Some are calling for a 0.5 percentage point rise as consumer prices are continuing to rise and the KRW-USD exchange rate is still high. According to others, a 0.25 percentage point increase is better in view of economic and financial market conditions.
It is not easy for the central bank to choose the latter. This is because the gap will become 1.5 percentage points if the Bank of Korea opts for it and then the Fed opts for a 0.75 percentage point adjustment in December. The former is not an easy option to choose, either. This is because the government and major financial holding companies are preparing to supply at least 50 trillion won and 95 trillion won to the financial market, respectively.
Last month, when the Bank of Korea raised its benchmark rate by 0.5 percentage point, two out of the seven decision makers advocated a 0.25 percentage point rise. This month, the number is likely to increase to three with another three mentioning the necessity of a 0.5 percentage point rise. Then, the final decision is up to the governor of the central bank.