[Weekly Review] All-in and Debt Investment 'Out' as Base Interest Rate Raised to 1.25%... 14 Trillion Won 'Election Budget Supplement'

Bank of Korea Raises Interest Rates... Government Continues 'Money Pumping'
Ongoing Controversy Over Fiscal and Monetary Policy Mismatch
Strong Start for Exports This Year

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea raised the base interest rate by 0.25 percentage points to 1.25%. By unusually raising the base rate twice in a row, the base rate has returned to the pre-COVID level (1.25%) after 22 months. The government has formalized the preparation of an additional supplementary budget (supplementary budget) worth 14 trillion won. With the supplementary budget prepared just one month after this year's budget execution, controversy over election-related spending is expected to continue.

◆Base interest rate raised again after 2 months= At the monetary policy meeting on the 14th, the Bank of Korea's Monetary Policy Committee raised the current base interest rate from 1.00% per annum to 1.25%, an increase of 0.25 percentage points. This rate hike is interpreted as a measure to respond to financial imbalances caused by strong inflation and continued capital inflows into asset markets. The expected interest rate hike by the U.S. Federal Reserve (Fed) in March also contributed to the decision.

With the rate hike, the interest burden from 'all-in borrowing and debt investment' is also expected to increase. The Bank of Korea estimated that during the normalization of the base rate (0.50%→1.25%) since last year, the annual interest burden on households will increase by 9.6 trillion won. The per capita interest burden is expected to rise from 2,896,000 won annually to 3,380,000 won, an increase of 484,000 won.

Additional rate hikes are expected according to future economic conditions. Bank of Korea Governor Lee Ju-yeol indicated further rate hikes, stating, "Even if the base rate is raised once more to 1.50% per annum, considering the future economic trends, the estimated neutral interest rate level, and rule-based rates, I do not think that a 1.50% base rate can be considered tightening." Experts analyzed that the base rate could be raised 2 to 3 more times to reach 1.5% to 1.75% by the end of the year. Professor Kim Taegi of Dankook University's Department of Economics said, "Due to significant economic uncertainty, a direction will be indicated in the second quarter, and an additional hike is expected in the third quarter," adding, "It could reach 1.75% by the end of this year."

◆Government decides to borrow for supplementary budget= Ahead of the presidential election, the government is launching a 14 trillion won spending spree with the fastest supplementary budget preparation in history. Although nearly 30 trillion won in excess tax revenue occurred last year, it is difficult to use it before the final accounts are settled, so the government plans to borrow funds to speed up COVID-19 response efforts. Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki stated at a government joint briefing, "Through a 'one-point supplementary budget' limited to support for small business owners and quarantine, additional quarantine support funds will be provided to self-employed and small business owners." The government plans to increase compensation funds for businesses restricted by operating bans by 1.9 trillion won and provide an additional 3 million won in quarantine support funds to small business owners and self-employed individuals whose sales have declined.

The announcement was strongly influenced by the extension of quarantine measures and errors in government tax revenue forecasts. The government eventually accepted the ruling party's demand for supplementary budget preparation after a roughly 10 trillion won discrepancy arose compared to the Ministry of Economy and Finance's initial excess tax revenue forecast of 19 trillion won.

Criticism continues that fiscal and monetary authorities are sending mixed signals as the government announced the supplementary budget simultaneously with the Bank of Korea's rate hike. Increasing liquidity in the market could further increase inflationary pressures. Regarding this, Governor Lee said, "Fiscal policy should take responsibility for supporting vulnerable groups struggling with uneven recovery," adding, "This is not a situation of conflict between monetary and fiscal policies."

◆First export of the year also shows strong performance... Economic recovery accelerates= This year's first export started strong, increasing nearly 25% compared to the same period last year. However, the trade balance recorded a deficit as the increase in imports outpaced exports.

According to the 'Export and Import Status from January 1 to 10' announced by the Korea Customs Service on the 11th, exports amounted to $13.9 billion, up 24.4% ($2.74 billion) compared to the same period last year.

Considering that the number of working days this month was 6.5 days, 0.5 days more than the 6 days in the same period last year, the average daily export amount was $2.15 billion, up 14.8% from $1.87 billion last year. By major items, semiconductors (23.3%), petroleum products (135.3%), passenger cars (26.2%), and precision instruments (29.2%) increased compared to the same period last year, while wireless communication devices (-51.0%) and ships (-61.4%) decreased.

Imports increased more sharply than exports. Imports from January 1 to 10 amounted to $18.9 billion, up 57.1% ($6.86 billion) compared to the same period last year. As a result, the trade balance recorded a deficit of $4.945 billion. Major imported items increased compared to the same period last year, including gas (392.5%), crude oil (79.9%), semiconductors (28.4%), and petroleum products (149.8%). Meanwhile, wireless communication devices (-42.5%) and semiconductor manufacturing equipment (-35.8%) decreased.