South Korea's Lee says country cannot avoid raising interest rates

By Heejin Kim and Cynthia Kim

SEOUL, Oct 13 (Reuters) - South Korea cannot avoid raising its benchmark interest rate in the near future to narrow a widening yield gap with the United States and align with global monetary tightening, President Lee Jae Myung said during a cabinet meeting on Tuesday.

Pointing to global debt pressures and a hawkish policy stance by the US Federal Reserve, Lee signaled that domestic rate hikes were a near certainty, even as he voiced concern over rising household debt and default risks.

"I heard that it's not that often that South Korea's key policy rate is lower than that of US. Now that (policy) rates are inversed, and that the Korean rates are lower (than the US), it seems we need to narrow this gap," Lee said.

"Ultimately, South Korea has no choice but to raise its interest rates, and an increase seems almost a foregone conclusion."

South Korea's benchmark interest rate is currently set at 3.00%, while the Federal Reserve funds rate is in the 3.75%-4.00% target range.

Lee's comments mark an unusual political intervention in interest rate policy, which is legally set independently by the Bank of Korea.

In a country with a history of political sensitivity over central bank autonomy, the remarks risk stoking concerns about the BOK's independence just as policymakers deliberate on further rate increases.

The comments come as the BOK is considering additional monetary tightening, following back-to-back rate hikes, according to analysts.

Elaborating on pressures facing the domestic economy, Lee described the race to tighten policy interest rates as "a global phenomenon that is likely to persist for a long time."

A BOK spokesperson did not immediately respond to a request for comment.