South Korea’s central bank faces decisions in whether to maintain or raise its key interest rate as a bigger-than-expected jump in global consumer prices have heightened inflation concerns.

The Bank of Korea is scheduled to hold its fourth monetary policy meeting this year on May 27, in which they are expected to decide whether to keep the national interest rate anchored at a record-low of 0.5 percent or change course.

While they may have smoothly maintained a dovish stance so far, amid lingering COVID-19 pandemic woes, they must now take inflation into account.

Inflation in the US in April accelerated at its sharpest pace since September 2008, as the Consumer Price Index there gained 4.2 percent on-year, data from the US Labor Department showed. The figure exceeded an earlier Dow Jones survey forecast of 3.6 percent, with experts saying that the reopening of the US economy and vaccinations have contributed to the acceleration.

In line with the US data, Korea’s consumer price index gained 2.3 percent in the same month on-year, compared with a 1.5 percent increase in March, according to Statistics Korea. The figure marked the sharpest on-year gain since August 2017 and could inch up above 3 percent in May or June “due to base effects from the deflationary shock in the previous year and a price surge in commodities,” Joo Won, chief of the economic research office at the Hyundai Research Institute said.

Inflation concerns have been sending jitters across Asia’s fourth-largest economy’s financial market as well, displaying increased market volatility as foreigners offloaded Kospi shares worth some 6 trillion won ($5.3 billion) in recent days.

While experts were divided on the timeframe concerning the BOK’s monetary policy shift, most believe that the dovish stance is to be maintained in its monetary policy meeting next week.

“The services inflation, which is a key part in overall inflation, is pretty low at the moment,” Park Sung-woo, analyst at DB Financial Investment said.

“So there is no immediate pressure for the BOK to raise its benchmark interest rate, which means there is low possibility for the monetary policy to change within this year,” he added, brushing off worries as market concerns.

The US Federal Reserve, have been reiterating that it has no immediate plans to pull back “its crisis levels of support” and sees price rises as temporary and the BOK is likely to follow its steps as precedent.

“The BOK is bound to follow the US Fed’s course of action,” Joo said.

“There is a possibility that the US Fed would start unwinding quantitative easing as early as the second half the year and most likely by the end of the year,” he added.

The BOK overall has been maintaining a cautious attitude towards inflation, with its monetary policy board members eyeing the possibility of a rate hike to combat market volatilities, but hinting that it may be “too early,” minutes from the latest policy meeting showed.

Meanwhile, Korea’s Ministry of Economy and Finance on Monday expressed concerns that if the US Fed starts to tighten its monetary policy, it could further uptick the nation’s snowballing household debt. It vowed to take “timely steps” when necessary, as market volatilities could grow if the US Fed fails to communicate with the market.

The ministry said it would continue discussing with the US government on issues related to foreign exchange rates and other policies.

The BOK has kept its benchmark interest rate at a record-low of 0.5 since May last year. 

By Jung Min-kyung (mkjung@heraldcorp.com)