Tension is building up within the financial market over whether the central bank will increase the nation’s key interest rate this week, for the first time in more than six years.

The market consensus as of Sunday was that the Bank of Korea’s monetary policy board, which is to hold its monthly meeting on Thursday, will raise the current record-low rate of 1.25 percent by 0.25 percentage points.

Hints an imminent rate hike have been building up for some time. Last month, while freezing the policy rate for the 16th consecutive month, the BOK suggested that a hike may be announced in the near future to keep in line with the economic recovery trend.

“We may consider some adjustment (in the interest rate) without being restrained by (slow) inflation, as long as the economic recovery holds out in the midterm flow,” BOK Gov. Lee Ju-yeol told reporters in late September.

The central bank’s stance has remained unchanged from June-July, when it stated that a key rate moderation may be needed when the economic situation improves further, Lee explained.

The policymaker also said that “conditions are gradually maturing” for tightening monetary policies, hinting at an approaching rate hike move.

Following his remarks, the bank’s monetary policy board’s decision in October included a minority opinion calling for a rate hike.

“The bond and foreign exchange markets have already reflected the anticipated rate hike,” said Oh Chang-seob, researcher at Korea Investment & Securities.

“There will be greater confusion in the market, should the central bank refrain from the hike plan, though the possibility of this remains low.”



Observers noted that the actual point is whether the board will make a unanimous rate hike decision or there will be a minority opinion on extending the status quo rate.

Weighing down on the BOK to inch up its long-stalled key rate is the US Fed’s gestures for imminent rate hike, as well as South Korea’s snowballing household debt which hit a record-high in the third quarter.

The outstanding total stood at 1.4 quadrillion won ($1.3 trillion) in the July-September period, up 9.5 percent from a year earlier and up 2.2 percent from the previous quarter, according to BOK data.

Another favorable factor is the general economic recovery trend as shown in recent indexes.

While most think tanks and international organizations forecast Korea’s growth rate to reach the 3 percent mark this year, the composite consumer sentiment index for November reached the highest in almost seven years. The nation’s secondary stock market Kosdaq has also been riding high recently, on the back of soaring investment into the bio sectors.

What may hold back the rate hike, however, is the fact that the labor market conditions and the actual household incomes have not yet entered the recovery stage. Consumer prices for November continued to remain under the BOK’s target of 2 percent, triggering concerns that a rate increase at this point in time may further discourage the market sentiment.

By Bae Hyun-jung (tellme@heraldcorp.com)