[Hanae Big Step] Base Interest Rate Raised by 0.50 Percentage Points to 2.25% (Update)

Unprecedented Big Step and Three Consecutive Rate Hikes Amid Soaring Prices

[Asia Economy Reporter Seo So-jeong] The Bank of Korea has taken a 'big step' by raising the base interest rate by 0.50 percentage points at once for the first time in history to curb inflation soaring to the highest level in 24 years.

This marks the third consecutive rate hike following 0.25 percentage point increases in April and May, a path the Korean economy has never taken before. With this drastic measure, the Bank of Korea has strongly revived its 'inflation fighter' instinct, and if it raises rates again at the remaining monetary policy meetings this year (August, October, November), the year-end base interest rate could reach up to 3.00%.

On the 13th, the Monetary Policy Board of the Bank of Korea held a monetary policy meeting and raised the base interest rate from 1.75% to 2.25%, an increase of 0.50 percentage points. Due to COVID-19, the Monetary Policy Board had lowered the base rate to 0.50% in May 2020, then signaled 'monetary policy normalization' by raising the rate by 0.25 percentage points on August 26 last year, followed by 0.25 percentage point hikes in November of the same year, and January, April, and May of this year.

With the 0.50 percentage point increase this time, the base rate reached 2.25%. While the Bank of Korea has previously implemented 'three consecutive rate cuts,' this is the first time in history it has raised rates three times in a row. During the global financial crisis from 2008 to 2009, including emergency Monetary Policy Board meetings, the Bank of Korea cut rates six consecutive times until February.

The Bank of Korea tightened monetary policy reins with this unprecedented 'big step' and 'three consecutive hikes' because, despite the previous two consecutive baby steps (0.25 percentage point increases), the consumer price index in June surged by 6.0% compared to a year earlier. This is the highest increase in 23 years and 7 months since November 1998 (6.8%) during the Asian financial crisis. The consumer price inflation rate stayed in the 2% range until September last year, rose to the 3% range by February this year, reached the 4% range in March and April, jumped to the 5% range in May, and broke through the 6% barrier in June.

Inflation expectations among economic agents are also growing. The expected inflation rate for the next year (general public) rose from 3.3% last month to 3.9%. Joo Won, head of research at Hyundai Research Institute, predicted, "If the current inflation trend continues, prices in July and August will be higher than in June."