Base Interest Rate Unanimously Held at 0.5% for One Year
May Raise Rates Before Fed...Focus on Korean Economic Trends
[Asia Economy Reporter Jang Sehee] As Lee Ju-yeol, Governor of the Bank of Korea, mentioned for the first time the possibility of a base interest rate hike within this year, concerns are emerging that the prices of high-risk assets will continue to decline due to future rate increases. This is because when the base interest rate rises, investments in high-risk assets are expected to shift to safe assets such as deposits.
Governor Lee stated at a press conference immediately after the Bank of Korea Monetary Policy Committee meeting on the 27th, "Whether to raise rates within the year ultimately depends on the development of the economic situation," adding, "We may raise rates before the U.S. Federal Reserve (Fed)." The Bank of Korea's Monetary Policy Committee had previously kept the base rate steady at 0.5% per annum, with a unanimous decision to maintain the rate.
In particular, Governor Lee revealed that discussions were held among the Monetary Policy Committee members regarding interest rate normalization, leading to analyses that the timeline for future rate hikes may be accelerating. Even the wording in the monetary policy direction mentioned the term "for the time being," hinting at the possibility of future rate increases.
The economic recovery trend and the rapidly increasing household debt add weight to the necessity of raising the base interest rate. Household debt stood at 1,765 trillion won at the end of March this year, having increased by 37.6 trillion won in the first quarter alone. Regarding this, Governor Lee explained, "While raising interest rates inevitably increases the burden on households, it is necessary to curb the rising trend of household debt."
Possibility of Sharp Declines in Real Estate and Stock Prices Cannot Be Ruled Out... However, the Rate Hike Magnitude Is Expected to Be Small
In the market, it is anticipated that phenomena such as money moves caused by rate hikes could exert downward pressure on the real estate and stock markets.
Professor Lee In-ho of Seoul National University’s Department of Economics said, "Depending on how much the interest rate is raised, there is a possibility of sharp declines in prices of real estate and stocks," adding, "However, since the principal and interest repayment burden of household debt must be eased, the next hike may be around 0.25 basis points."
Professor Ahn Dong-hyun of Seoul National University’s Department of Economics stated, "Usually, when lowering rates, it is done in tandem with the Fed, but raising rates can be done depending on the situation." If the U.S. falls into a recession, most countries are affected, causing a decline in market vitality, but the speed of recovery varies. He further predicted, "Once herd immunity to COVID-19 is achieved and the economy gradually recovers, rates could be raised before the Fed."
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