South Korea raises interest rates to record high as debt threats rise
- South Korea’s base rate raised to 0.75%, as expected
- First rate hike since November 2018 aimed at curbing debt growth
- Board member Joo Sang-yong the sole dissenter in the hike decision
SEOUL, Aug.26 (Reuters) – The Bank of Korea on Thursday raised its key rate for the first time in nearly three years, becoming the first major Asian central bank to move away from pandemic-era monetary parameters as increasing consumer debt created new threats to the economy.
Governor Lee Ju-yeol maintained his hawkish tone and suggested the bank could tighten policy further, as data showed Asia’s fourth-largest economy was overheating.
“We won’t do things in a hurry, but neither will we hold out,” Lee said at a press conference, responding to a question about the timing of further tightening.
“As for the timing of the further hikes, we will look at how the COVID-19 situation has developed and changes in the direction of Fed policy direction, which would have a significant impact for us, as well as how financial imbalances. “
Joo Sang-yong, a known dove on the BOK board, was the only one of six board members to vote to keep rates stable as the bank raised the benchmark interest rate (KROCRT = ECI) 25 basis points at 0.75%, as expected. by most analysts. Read more
The BOK also raised its inflation projection to 2.1% from 1.8% previously, signaling that conditions are preparing for further policy tightening.
“If there is another rate hike this year, it will likely be in November, given that there will be at least two or three rate hikes needed, including today’s meeting to deal with the risk of financial imbalance “, Paik Yoon-min, Fixed Income Analyst. at Kyobo Securities, which now sees another hike in November, transmitted from January 2022.
The benchmark KOSPI fell sharply after the rate decision, while the South Korean won strengthened.
Policymakers have been reporting higher rates since May, but expectations of a hike have recently been lowered due to the latest COVID-19 outbreak in South Korea, which has forced the economy into a semi-lockdown. Read more
Central banks around the world are paving the way for a transition away from the crisis-era stimulus measures, as what started as emergency support for collapsing growth now overheats many economies.
The BOK move comes a day before Federal Reserve Chairman Jerome Powell delivers his speech at the US central bank’s annual symposium in Jackson Hole, where he is expected to signal the future direction of US monetary policy. Read more
Most of the central banks that have raised rates this year are in emerging economies, concerned about capital flight and imported inflation. In Asia, Sri Lanka hiked rates last week, becoming the first in the region to do so. Read more
The BOK’s move poses a calculated risk that South Korea’s export-driven economy, which rebounded from last year’s pandemic crisis, will be healthy enough to start slashing stimulus, all the more that excess debt is quickly becoming an economic problem. Read more
This contrasts with New Zealand, which delayed a widely expected interest rate hike last week as its first COVID-19 outbreak in six months left uncertainty over its economic recovery. Read more
Analysts expect the BOK to raise interest rates next year, with most seeing the base rate at 1.25% by the end of 2022, although Governor Lee’s comments suggest that the bank remains in a hawkish position.
The policy decision is the first rate review the BOK has had as a six-member body after board member Koh Seung-beom stepped down to lead the regulator of the Financial Services Commission.
Two more interest rate review meetings are scheduled for this year.
Additional reporting by Choonsik Yoo, Jihoon Lee Editing by Sam Holmes
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