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

BOK Ends Ultra-Low Interest Rate Era with 0.25%p Base Rate Hike

Additional Rate Increase Possible as Early as October

Preemptive Rate Hike Ahead of the U.S... Seventh Rate Increase Among OECD Countries This Year

Maintains 4% Growth Forecast, Raises Inflation Projection to 2.1%

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] The Bank of Korea (BOK) has ended the ultra-low interest rate era by raising the base rate to 0.75% per annum. This comes 15 months after applying the historically lowest base rate of 0.50% per annum in response to the COVID-19 pandemic.

On the 26th, the BOK's Monetary Policy Committee held a meeting on monetary policy direction at the BOK headquarters in Jung-gu, Seoul, chaired by Governor Lee Ju-yeol, and announced that the base rate was raised from 0.50% to 0.75%. This is the first rate hike by the BOK in 33 months since November 2018. Although uncertainties related to COVID-19 remain, the decision reflects the judgment that the rapid increase in household loans and rising housing prices and inflation can no longer be overlooked. Despite stringent lending regulations by financial authorities, debt continues to rise, prompting the BOK to respond with the 'rate hike' card.

Governor Lee stated at a press conference immediately after the rate hike, "Although private consumption has somewhat slowed due to the resurgence of COVID-19, exports remain strong and facility investment shows a steady trend," adding, "The domestic economy is expected to gradually recover, centered on private consumption, supported by expanded vaccination and the execution of supplementary budgets." The BOK maintained its growth forecast for this year at 4.0%, the same as in May, and projected 3.0% growth for next year.

The BOK also revised upward its inflation forecast for this year from 1.8% to 2.1%, a 0.3 percentage point increase. With consumer price inflation exceeding the BOK's 2% target for four consecutive months, the central bank acknowledged that inflationary pressures are stronger than expected. The inflation forecast for next year was also raised from 1.4% to 1.5%.

Governor Lee said, "Although uncertainties related to COVID-19 continue, the domestic economy is expected to sustain a favorable growth trend, and inflation is anticipated to remain above 2% for some time," adding, "We will gradually adjust the degree of monetary policy easing going forward." Regarding the timing of additional rate hikes, he noted, "We will carefully review the progression of COVID-19, changes in growth and inflation, accumulated risks of financial imbalances, and monetary policy changes in major countries before making a decision."

Among the 38 member countries of the Organisation for Economic Co-operation and Development (OECD), South Korea is the seventh country to raise interest rates this year. Countries that raised rates earlier this year include Mexico, Iceland, the Czech Republic, Chile, Turkey, and Hungary, mostly emerging economies with high inflation concerns. Among Asian countries, South Korea is the first to raise rates since the onset of COVID-19. Among advanced economies, New Zealand has indicated a possible rate hike by the end of this year, and Norway has hinted at a rate increase in September.

Economist Gong Dong-rak of Daishin Securities evaluated, "The BOK has focused on financial imbalance issues caused by real estate problems and the rapid increase in household debt." Professor Kim Sang-bong of Hansung University’s Department of Economics also said, "The surge in household loans due to liquidity expansion was the basis for the rate hike," adding, "Since market interest rates have already anticipated the rate hike and risen, the market shock is expected to be limited."