The Bank of Korea Raises Base Interest Rate to 1.75%... Late-Year Projection at Mid-to-High 2% Range

Bank of Korea Governor Lee Chang-yong's First Monetary Policy Meeting
Base Interest Rate Rises by 0.25 Percentage Points
First Consecutive Increase in Two Months in 15 Years
Inflation Rate Forecast Also at 4%

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee plenary meeting held on the 26th at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

[Asia Economy Reporter Seo So-jeong] The Bank of Korea tightened its monetary policy reins sharply by raising the base interest rate on the 26th and significantly revising upward this year's consumer price inflation forecast to 4.5%, the highest in 13 years and 10 months. This was an unusual move as it was the third rate hike this year and the second consecutive monthly increase following April, but it clearly signaled that this stance will continue going forward.

If the Bank of Korea raises rates again at the remaining monetary policy meetings this year (July, August, October, November), the year-end base rate could rise to as high as 2.75%. Even with one or two speed adjustments, it is certain to rise to the mid-2% range.

On this day, the Monetary Policy Board of the Bank of Korea held a monetary policy meeting and raised the base interest rate by 0.25 percentage points from 1.50% to 1.75% per annum. Previously, in response to the expected economic recession due to the COVID-19 pandemic, the Monetary Policy Board lowered the base rate to 0.50% in May 2020, then after nine consecutive holds, announced the 'normalization of monetary policy' by raising it 0.25 percentage points on August 26 last year. The base rate was subsequently raised by 0.25 percentage points in November of the same year, January, and April of this year, reaching 1.75% with this additional hike.

As inflationary pressures intensified, the Monetary Policy Board, which made an additional rate hike last month amid the unprecedented absence of a governor, tightened monetary policy reins again at the first meeting held after Governor Lee Chang-yong's inauguration. The Bank of Korea's consecutive rate hikes for two months in a row is the first time in 14 years and 9 months since July and August 2007. Considering that the call rate was the policy rate at that time, this is effectively the first time the base rate has been raised for two consecutive months since it became the policy rate. Following two consecutive rate hikes in November last year and January this year, the Bank of Korea's unusual decision to raise rates for two consecutive months reflects the rapidly spreading inflationary pressures across the board.

In its revised economic outlook released on this day, the Bank of Korea raised the consumer price inflation forecast from the current 3.1% by 1.4 percentage points to 4.5%. This is the highest level in 13 years and 10 months since the 4.8% inflation forecast in July 2008. The real gross domestic product (GDP) growth rate for this year was also revised downward from 3.0% to the mid-to-late 2% range. Governor Lee said, "Inflation is expected to exceed the target level for a considerable period, so monetary policy will be operated with a greater focus on inflation going forward."