[Interest Rate Hike] Bank of Korea Raises Base Rate to 0.75%... 'Ultra-Low Interest Rate Party' Ends (Comprehensive)

Frozen at 0.50% for 15 Months
Surge in Household Loans and Real Estate Prices Addressed with 'Interest Rate Card'
Experts Say "Forward Guidance Effect Likely Won't Cause Major Market Shock"

[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 Board meeting chaired by Governor Lee Ju-yeol at the Bank’s headquarters in Seoul and announced that the base interest rate was raised from 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 surge in household debt due to abnormally low interest rates poses a greater risk. The Bank intends to respond to 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” card.

Bank of Korea Responds to Surge in Household Loans and Rising Home Prices by Raising Interest Rates

The Bank of Korea raised rates because it could no longer ignore the financial imbalance caused by excessive growth in household loans and the concentration of money in real estate. Household debt reached 1,806 trillion won in the second quarter. The scale of household debt, which was 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 decide that a rate hike is necessary as a response.

The rise in home prices closely linked to household loans was also taken into consideration. Governor Lee previously analyzed at a monetary policy meeting last month that the rise in real estate prices is closely related to the increase in debt, stating, “Housing prices are judged to be considerably overvalued.”

According to the weekly apartment price trend announced by the Korea Real Estate Board for the third week of August (as of the 16th), the sales price in the Seoul metropolitan area rose 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 in history.

Monetary Policy Board Emphasizes Financial Imbalance... Limited Market Impact

In this regard, Professor Donghyun Ahn of Seoul National University’s Department of Economics said, “This interest rate decision appears to emphasize financial imbalances such as the increase in household loans and asset price bubbles,” adding, “It is more effective to respond to household loan problems through monetary policy rather than regulation.”

The financial market shock caused by this rate hike is expected to be limited. Since May, the Bank of Korea has announced three times its intention to raise the base interest rate within the year, and last month’s Monetary Policy Board meeting saw a minority opinion advocating a rate hike for the first time.

Professor Ahn said, “Because the Bank of Korea gave forward guidance indicating a rate hike within this year, the market has already priced it in,” adding, “There will likely be some increase in volatility and a slight rise in interest rates.”

Professor Sangbong Kim of Hansung University’s Department of Economics also said, “The market has already anticipated the rate hike, and market interest rates have risen, so the market shock is expected to be less than anticipated.”