KDI Advises BOK to Pace Itself in Raising Interest Rates

The Korea Development Institute (KDI) said on May 16 that the South Korean government would be able to limit the impact of U.S. tapering on the South Korean economy to a temporary rise in consumer prices with an independent monetary policy, whereas raising the key rate to follow the United States would lead to a substantial economic slowdown.

Last month, the United States posted an inflation rate of 8.3 percent whereas South Korea’s inflation rate was 4.8 percent. “Although it is true that the Bank of Korea needs to raise the key rate in order to curb inflation, it should pace itself in view of the difference between the United States’ and South Korea’s economic and inflationary conditions,” the institute pointed out, adding, “At present, the South Korean economy does not need a key rate change as fast as that of the United States, where inflation is higher and economic recovery is faster.”

According to the institute, the possibility of capital outflow is low, even with the key rate lower in South Korea than in the United States. “In the 2000s, there has been no large-scale capital outflow from South Korea attributable to different key rates,” it said, continuing, “Today’s South Korean economy is pretty sound in relation to the outside and a rapid capital outflow is rather unlikely.”

“The U.S. key rate was higher than South Korea’s in June 1999 to February 2001, August 2005 to August 2007, and March 2018 to February 2020, and no large-scale capital outflow occurred in those periods,” it explained, adding, “When it comes to the won-dollar exchange rate, the South Korean government should avoid intervention and consider signing a currency swap deal with the United States.”