[Weekly Review] The End of the Zero Interest Rate Era... Base Rate at 1.0%

BOK Raises Base Rate by 0.25%P Again After 3 Months
Housing Comprehensive Real Estate Tax Targets Near 950,000
Passenger Car Individual Consumption Tax Reduction Extended Until June Next Year

[Asia Economy Reporter Joo Sang-don] The Bank of Korea's base rate, which had dropped to the 0% range during the COVID-19 crisis response, has returned to the 1% range for the first time in 1 year and 8 months. The era of zero interest rates has ended, and the period of full-scale rate hikes has arrived. Borrowers, including the so-called ‘Yeongkkeul’ and ‘Bittou’ groups who increased loans during the ultra-low interest rate period, are expected to face greater repayment pressure and interest burdens.

The BOK Monetary Policy Committee held a meeting on the 25th at the main building in Jung-gu, Seoul, chaired by Governor Lee Ju-yeol, and announced that it raised the base rate from 0.75% to 1.00% per annum. This was another rate hike within three months due to the high level of household debt and soaring inflation. It is the first time in 10 years since March 2014 (3%→3.25%) that the BOK has raised rates within three months.

The rate hike is a measure to respond to the surge in household loans and rising inflation amid ongoing economic recovery. Governor Lee said at the briefing, "The domestic economy shows favorable trends in exports and investment, and private consumption recovery is expected to strengthen." The judgment was made that since the economy is recovering, ultra-low interest rates should be normalized and soaring inflation curbed.

The BOK raised its inflation forecast for this year from 2.1% to 2.3%. The inflation forecast for next year was also raised from 1.5% to 2.0%. Meanwhile, the economic growth forecasts for this year and next year remained at 4.0% and 3.0%, respectively, as announced in August.

◆BOK Maintains 4.0% Growth Rate... Inflation to Continue Rising This Year and Next= The BOK maintained its economic growth forecasts for this year and next year at 4.0% and 3.0%, respectively, as announced in August. Some point out that growth could be constrained due to ongoing global supply chain bottlenecks and COVID-19 resurgence. Additionally, with the BOK raising consumer price inflation forecasts for this year and next, inflationary pressures are expected to increase further.

The Monetary Policy Committee maintained this year's growth rate at 4.0%. It expects domestic demand to rise with the implementation of "With Corona" (gradual return to normal life) amid continued export recovery.

In fact, exports until the 20th of this month amounted to $39.9 billion, a 27.6% increase compared to the same period last year. Considering working days, the average daily export amount increased by 23.7%, which is expected to positively contribute to 4% growth. Consumption increases were also considered. Retail sales in September rose 2.5% from the previous month, the largest increase in six months since March (2.5%). Additionally, the effect of the supplementary budget executed in the third quarter is expected to be reflected with a time lag in the fourth quarter.

◆From 330,000 to 950,000... Comprehensive Real Estate Tax Targets Tripled Under Moon Administration= Due to the surge in real estate prices and the increase in comprehensive real estate tax rates, the number of housing-related comprehensive real estate tax notices this year approached 950,000. This far exceeded the ruling party's initial estimate of over 800,000. Especially considering that the number of tax targets was about 330,000 in the first year of the Moon Jae-in administration, the number of notices has nearly tripled in five years, and the tax amount has increased more than tenfold.

According to the 2021 housing-related comprehensive real estate tax notice details announced by the Ministry of Economy and Finance on the 22nd, the number of notices this year reached 947,000, and the tax amount reached 5.7 trillion won. The number increased by 280,000 (41.9%) and the tax amount by 3.9 trillion won (216.7%) compared to last year. Compared to 2017, the first year of the Moon administration, the number of targets (332,000) increased 2.9 times in five years, and the tax amount (559.5 billion won) surged 10.2 times.

The comprehensive real estate tax is levied on those who own taxable houses and land subject to property tax in Korea as of the tax base date (June 1 every year). Since the Moon administration, with the rapid rise in real estate prices and simultaneous increases in comprehensive real estate tax rates, fair market value ratios, and official price realization rates, the number of taxpayers and tax amounts have been rapidly increasing every year.

◆Passenger Car Individual Consumption Tax Reduction Extended by 6 Months= The government decided to extend the deadline for the passenger car individual consumption tax reduction, which was scheduled to end at the end of the year, by six months. This decision was made considering that delays in vehicle deliveries due to the semiconductor shortage might prevent consumers from fully benefiting from the tax reduction.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki chaired the Emergency Economic Central Countermeasures Headquarters meeting at the Government Seoul Office on the 23rd and announced, "The passenger car individual consumption tax reduction will be extended until June next year."

When purchasing a passenger car, individual consumption tax, education tax (30% of the individual consumption tax), and value-added tax are applied. The government reduced the passenger car individual consumption tax by 30%, from 5% to 3.5%, for 1 year and 6 months from July 2018 to the end of 2019. In the first half of last year, when COVID-19 spread, the tax was lowered to 1.5%, and in the second half, the reduction was restored to 30%. This year, the government extended the 30% reduction for six months until June and decided to maintain the 30% reduction policy until the end of the year.

The reason for extending the tax reduction is largely due to the semiconductor shortage causing delays in vehicle deliveries, resulting in more consumers missing out on the tax benefits. Deputy Prime Minister Hong said, "We will take measures to reduce purchase costs for consumers who bought vehicles this year but will receive them in the first half of next year."

◆Hydrogen Charging Stations to Be Established in All Cities and Counties Nationwide by 2025= The government plans to install hydrogen charging stations in all cities and counties nationwide by 2025. To this end, it plans to increase the current 131 stations to 450 in four years.

The Ministry of Environment announced the 'Strategic Deployment Plan for Hydrogen Charging Stations' at the Hydrogen Economy Committee meeting held at Lotte Hotel Seoul on the 26th, chaired by Prime Minister Kim Boo-kyum.

This plan is the first implementation plan for the next five years (2021?2025) based on the Air Quality Preservation Act. The main goal of the deployment plan by 2025 is to expand infrastructure evenly so that hydrogen vehicle users can use hydrogen charging stations anytime and anywhere. A Ministry of Environment official explained, "The deployment plan was established considering regional distribution, hydrogen vehicle supply performance and plans, user accessibility, and traffic volume."

Currently, most hydrogen charging stations are concentrated in major cities such as Seoul, the metropolitan area, and metropolitan cities. There is not a single station in 164 basic local governments. The government plans to establish at least one hydrogen charging station in principle in all 226 cities and counties nationwide by 2025. To this end, stations will be placed on public institution sites, and areas without stations will be prioritized when selecting private subsidy project operators. By expanding charging infrastructure, the government plans to increase the number of hydrogen vehicles from the current 19,000 to 200,000 by 2025. The plan also includes a goal to increase the number of hydrogen charging stations nationwide to 1,200 by 2040.