End of ‘0% level’ ultra-low interest rate

BOK raises key interest rate by 0.25%P by 1%
Considering inflation and household debt amid economic recovery
“We do not rule out additional hikes in the first quarter of next year”

The benchmark interest rate, which fell to 0% last year to prevent the economic downturn caused by COVID-19, was raised to the 1% level again for the first time in 20 months. Bank of Korea Governor Lee Ju-yeol said, “I don’t think it is necessary to rule out an increase in the first quarter of next year.” With the normalization of monetary policy in full swing, the era of ultra-low interest rates is coming to an end.

The Bank of Korea Monetary Policy Committee (Monetary Policy Committee) held a monetary policy direction meeting at the Bank of Korea in Jung-gu, Seoul on the 25th and raised the base rate by 0.25 percentage points to 1.00% from 0.75%. This marks the 0.25 percentage point increase in three months after raising the base interest rate by 0.25 percentage points for the first time in 15 months in August last year.

In the Monetary Policy Direction Resolution Statement, the Monetary Policy Committee stated that “in the case of the domestic economy, the recovery of private consumption will be strengthened while exports and investment continue to flow well.”

As the domestic economy continues to grow despite disruptions in supply chains around the world, it was decided that the base rate could be raised. The accumulation of financial imbalances, such as higher-than-expected inflation and a surge in household debt, also contributed to the increase.

“It is of course necessary to normalize the interest rate, which was excessively lowered in line with the improvement of the economic situation,” said Governor Lee.

The BOK kept its forecast for real gross domestic product (GDP) growth this year and next year at 4.0% and 3.0%. The inflation rate is expected to be longer than expected. The MPC said that the inflation rate is expected to exceed the target level for a ‘considerable period’ due to the increase in petroleum prices and the rise in the core inflation rate. The BOK also raised the consumer price inflation rate for this year and next year to 2.3% and 2.0%, by 0.2 percentage points and 0.5 percentage points, respectively, through the revised economic forecast.

Experts predict that the MPC will increase the base interest rate by an additional 0.25 percentage points in the first quarter of next year, and then further increase it to a maximum of 1.75% in the second half of the year. Seong Tae-yoon, a professor at Yonsei University, said, “Inflationary pressures are rising in all directions and household debt is growing strong, so we have no choice but to raise the base rate. said

As a result of today’s rate hike, the gap with the US Federal Reserve’s base rate (0.00-0.25%) widened to 0.75-1.00 percentage points. Since this rate hike has been virtually foretold, its impact on the financial market has been limited. In the Seoul foreign exchange market, the won-dollar exchange rate ended at 1190.2 won per dollar, up 3.7 won from the previous day. The KOSPI closed at 2980.27, down 14.02 points (0.47%) from the previous day.


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