[Interest Rate Hike] Bank of Korea Raises Base Rate to 0.75% for the First Time in 2 Years and 9 Months (Update)

Focus on Correcting Financial Imbalances... 15 Months After Freeze

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] The Bank of Korea has put an end to the ultra-low interest rate era by raising the base interest rate to 0.75% per annum. This is the first rate hike in 2 years and 9 months since November 2018, and the first increase in 15 months since the rate was held steady at 0.50%.

On the 26th, the Bank of Korea held a Monetary Policy Committee meeting chaired by Governor Lee Ju-yeol at the Bank’s headquarters in Seoul and announced that the base interest rate was raised from the previous 0.50% to 0.75%.

Although the fourth wave of COVID-19 is still ongoing and the Delta variant is spreading worldwide, maintaining uncertainty, the Bank of Korea appears to have judged that the explosive growth of household debt due to abnormally low interest rates poses a greater risk. The Bank intends to address the side effects of the surge in household loans and rising real estate prices caused by ultra-low interest rates with the 'interest rate hike' measure.

The Bank raised rates because it could no longer overlook the financial imbalance caused by excessive growth in household loans and the concentration of funds in real estate. Household debt reached 1,806 trillion won in the second quarter. Household debt, which was around 1,600 trillion won in 2019, increased sharply to 1,727 trillion won in 2020, 1,765 trillion won in the first quarter of this year, and 1,806 trillion won in the second quarter.

Despite efforts by financial authorities and banks to manage household loans, the upward trend has not slowed, prompting the Bank of Korea to respond with an interest rate hike.

The rise in housing prices closely linked to household loans was also taken into consideration. Governor Lee previously noted at a monetary policy meeting last month that the rise in real estate prices is closely related to the increase in debt, analyzing that "housing prices are considered to be significantly overvalued."

According to the weekly apartment price trend for the third week of August (as of the 16th) released by the Korea Real Estate Board, the sales price in the Seoul metropolitan area rose by 0.40% in one week, the highest weekly increase since the statistics began in May 2012. According to the Korea Real Estate Board’s nationwide housing price trend survey, the average sales price of apartments in Seoul in July was 1.1093 billion won, rising by 181.17 million won from the previous month, surpassing 1.1 billion won for the first time.

Regarding this, Professor Andonghyun of Seoul National University’s Department of Economics said, "This interest rate decision seems to emphasize financial imbalances such as the increase in household loans and asset price bubbles," adding, "It is more effective to respond to the household debt problem through monetary policy rather than regulation."