[Interest Rate Hike] Bank of Korea Raises Base Rate to 1.25%... Returns to 'Pre-COVID' Level (Update)

Interest Rate Raised by 0.25%p After 2 Months Due to Inflation, Household Debt, and Fed Tightening
Lee Ju-yeol "Adjusting Monetary Policy According to Economic Improvement"

[Asia Economy Reporter Jang Sehee] The Bank of Korea has raised the base interest rate to 1.25%. This is the first increase in two months since the hike in November last year, and the first consecutive rate hike since 2008. As a result, the base interest rate has returned to the pre-COVID level (February 2020 · 1.25%).

The Monetary Policy Board of the Bank of Korea held a meeting on the 14th at the Bank of Korea headquarters in Jung-gu, Seoul, chaired by Governor Lee Ju-yeol, and announced that the base interest rate was raised from the previous 1.00% per annum to 1.25%. It is the first time in 10 years since January 2011 (2.50→2.75%) and March 2011 (2.75%→3.00%) that the Bank of Korea has raised rates twice within two months, following the increase in November last year.

This move is interpreted as a measure to respond to inflation and financial imbalances. Additionally, the expected interest rate hike by the U.S. Federal Reserve (Fed) in March also contributed to the decision.

Last year, consumer prices rose by 2.5%, marking the highest level in 10 years. With economic recovery, demand-side inflationary pressures are expected to increase further. In particular, public utility fees such as electricity and gas are scheduled to rise from April, so there is a judgment to preemptively reduce inflationary pressures.

There is also a strong intention to further solidify the slowdown in the increase of household debt. Amid a slight deceleration in household loan growth recently, the rate hike aims to curb excessive borrowing.

In fact, household loans increased by 200 billion won in December compared to the previous month, significantly narrowing the increase from the previous month (5.9 trillion won). While the monthly trend is slowing, household credit remains at a high level. In the third quarter of 2021, household credit stood at 1,844.9 trillion won, up 36.7 trillion won from the previous quarter (1,808.2 trillion won). The year-on-year growth rate also recorded 9.7%.

There is also an analysis that this was a preemptive response to prevent capital outflows. If the interest rate gap between Korea and the U.S. widens, capital outflows and upward pressure on the exchange rate may increase. The market expects the Fed to raise the base interest rate more than four times this year.

Meanwhile, this additional rate hike is regarded as an expected step. Governor Lee also stated in his 2022 New Year's address that "the degree of monetary policy easing will be appropriately adjusted in line with the improvement of the economic situation." Earlier, the Bank of Korea conducted a 'big cut' in March last year, lowering the base rate from 1.25% to 0.75%, and then reduced it further to a record low of 0.5% in May of the same year. After maintaining the rate for 15 months, it raised the rate by 0.25 percentage points in August and November.