Skip to content
  • KOSPI 2839.01 -70.31 -2.42%
  • KOSDAQ 965.63 -26.71 -2.69%
  • KOSPI200 373.24 -8.39 -2.20%
  • USD/KRW 1193.4 0.40 0.03%
  • JPY100/KRW 1,049.56 0.03 0.00%
  • EUR/KRW 1,347.59 0.45 0.03%
  • CNH/KRW 186.8 0.16 0.09%
View Market Snapshot

Central banking

Bank of Korea raises interest rates, signals further hikes

Raises 2022 inflation forecast to 2.0% from 1.5%; Governor Lee doesn't exclude another interest rate hike as early as Q1

By Nov 25, 2021 (Gmt+09:00)

Bank of Korea Governor Lee Ju-yeol
Bank of Korea Governor Lee Ju-yeol

South Korea’s central bank increased its policy interest rate for the second time in three months and signaled further hikes to stem rising inflationary pressure and soaring household debt.

The Bank of Korea hiked the base interest rate by 25 basis points to 1.00% on Nov. 25, as widely expected. It last bumped up the policy rate by 0.25 percentage point from a record-low of 0.50% in August, becoming the first central bank in Asia to end its ultra-easy monetary policy stance that supported economic growth during the pandemic era.

The central bank also raised its inflation forecast for the next year to 2.0% from the previous 1.5%, adding to expectations that the monetary authority is likely to lift the policy rate to up to 1.75% in 2022.

“We need to normalize interest rates that had been excessively lowered, considering an improvement in economic conditions,” said BOK Governor Lee Ju-yeol, adding inflationary pressures from the supply side are expanding to the demand side, in an online press conference after the decision.

“I don’t think we can rule out the possibility of a hike in the first quarter (of 2022), although the decision depends on the economic situation,” Lee said when asked if the central bank may refrain from raising rates ahead of the presidential election in March.

Consumer inflation accelerated to a near 10-year-high in October despite the rate hike in August.

CONSUMPTION TO REMAIN STRONG

The BOK still sees the economy expanding 4% in 2021 and 3% in 2022 as forecast in August.

“Going forward, the improvement of private consumption is likely to strengthen, while exports and investment are expected to sustain favorable movements,” the central bank said in a statement.
Customers look at shoes at a department store in Seoul
Customers look at shoes at a department store in Seoul

Governor Lee expected domestic consumption to weather the rate hike’s impact on households and the recent resurgence in COVID-19 infections.

“Household burdens are predicted to gradually increase due to higher borrowing costs that will cut disposable income. But it will not significantly hurt overall consumption growth. Private consumption is rapidly recovering thanks to fiscal support,” Lee said. The government provided a series of financial supports to spur the economy.

In September, the central bank has said a 25-bp rise in the policy rate was estimated to ramp up household borrowing costs by 2.9 trillion won ($2.4 billion) a year.

The higher policy rates have already been increasing the borrowing costs of loans from local banks. Fixed interest rates on mortgage loans from the country’s four largest lenders – Kookmin Bank, Shinhan Bank, Hana Bank and Woori Bank – rose to 3.76-5.12% as of Nov. 19 from 2.69-4.20% at the end-2020.

Household credits outstanding rose by 36.7 trillion won to 1,844.9 trillion won as of end-September from the previous three months, according to the Bank of Korea on Nov. 23.

LIMITED IMPACT FROM COVID-19 RESURGENCE

Lee also played down speculation that a sharp rebound in COVID-infections after the government’s move to phase out measures against the pandemic may slow the central bank’s move to raise interest rates.

“The government will strengthen restrictions but they will not hurt overall economic activity. So, consumption is expected to keep recovering,” Lee said. “Out forecasts have already reflected the pandemic’s resurgence and stricter measures that will support the economy.”

The country on Nov. 23 reported a daily record of 4,115 new COVID-19 cases, prompting the government to consider measures to curb the pandemic.
People line up to take COVID-19 tests at a screening clinic in Seoul
People line up to take COVID-19 tests at a screening clinic in Seoul


Write to Ik-Hwan Kim at lovepen@hankyung.com

Jongwoo Cheon edited this article.

Comment 0

0/300