SEOUL, March 16 (Xinhua) -- South Korea's central bank is expected to be placed under growing pressure to raise its benchmark interest rate, which has stayed at an all-time low for eight months, following the U.S. Federal Reserve's rate hike.
South Korean stocks advanced 0.8 percent Thursday on expectations for a gradual rate hike in the United States, but the Bank of Korea (BOK) is forecast to face rising pressures to hike its record-low policy rate.
The Fed raised its benchmark rate by a quarter percentage point to a range of 0.75-1.00 percent overnight, after lifting the rate by the same margin in December.
The U.S. central bank indicated three rate hikes in 2017, heralding two more increases for the rest of this year.
The BOK had slashed the benchmark seven-day repurchase rate from 3.25 percent in July 2012 to an all-time low of 1.25 percent in June last year.
BOK Governor Lee Ju-yeol helped the Park Geun-hye government encourage households to purchase new homes with borrowed money.
Household debts in South Korea have kept a record-breaking momentum amid the record-low borrowing costs.
Lee's push for excessively accommodative monetary stance lessened room for future rate cuts in preparation for a possible economic slowdown. The International Monetary Fund (IMF) recently cut its 2017 growth outlook for the South Korean economy to 2.6 percent from 3.0 percent estimated three months earlier.
The BOK governor told lawmakers on Feb. 28 that any automatic response to the U.S. rate hike will not be made though the BOK's future monetary policy would be affected by the Fed's rate increase.
Lee's remarks indicated the prolonged low-rate trend for the time being. Hyundai Research Institute (HRI), a local economic think tank, said in a report that the U.S. benchmark rate would be hiked to 1.4 percent by the year-end, 0.15 percentage points higher than South Korea's counterpart.
The BOK has refrained from altering its policy rate since it cut the rate to the current level of 1.25 percent in June last year.
Despite the protracted record-low rate by the BOK, market rates in South Korea already reflected expectations for higher U.S. interest rates.
Rates for home-backed loans extended by banks surged to as high as 4.8 percent, increasing debt-serving burden for households that are already struggling with lower income and higher unemployment.
Higher borrowing costs would weigh down further on private consumption, expanding a side effect from the past excessive rate cuts pushed by the BOK governor.