Interest rate hike background and outlook
Lee Ju-yeol, governor of the Bank of Korea, presides over a plenary session of the Monetary Policy Committee held at the Bank of Korea in Jung-gu, Seoul on the morning of the 25th. provided by the bank
Growth and inflation continue to expand
The real benchmark interest rate is ‘negative’
It also mentions the abundant liquidity.
Market line “Additional increase in the first and third quarters”
By raising the base rate in November, Bank of Korea Governor Lee Ju-yeol reiterated his will to ‘normalize interest rates’. Governor Lee strongly hinted at the possibility of further hikes, saying that raising the base rate is “normalization, not austerity,” under the current circumstances.
Inside and outside the financial market, the observation that the BOK will raise the base rate in the first quarter of next year and then raise it one or two more times in the second half is gaining strength.
The Bank of Korea Monetary Policy Committee’s (Monetary Policy Committee) hike in the base rate on the 25th has already been foretold to some extent, and Governor Lee said, “The Monetary Policy Committee will continue to operate monetary policy in the direction of appropriately reducing the degree of easing in line with the improvement of the economic situation.” said. However, on the same day, Monetary Policy Committee member Joo Sang-young expressed a minority opinion that it would be better to keep the base rate at the current level.
While explaining that the 1.00% annual interest rate is still at an accommodative level, Governor Lee has repeatedly expressed the need for ‘normalization’. The reason was that the real base rate remained negative (-), lower than the neutral rate, and liquidity was still abundant, such as the double-digit growth rate of the money supply (M2) from the same period last year. “Recently, as growth and inflation continue to expand, if monetary policy remains still, the degree of easing is increasing,” Lee said.
Recently, some have argued that the MPC should adjust the rate of rate hike in order not to dampen the economic recovery. In response, Governor Lee said, “The Monetary Policy Committee considers this economic situation more than anyone. We are adjusting the interest rate because it is too large,” he said.
It is expected that monetary policy normalization will help alleviate financial imbalances such as the recent increase in household debt. A survey showed that household loan growth slowed slightly in the third quarter of this year, centering on credit loans.
“Macroprudential policies need to be consistently pursued in the future,” said Governor Lee. said.
As Governor Lee reiterated his intention to normalize interest rates, the possibility of an additional hike in the first quarter of next year is also being discussed. Governor Lee also said, “It will depend on the economic situation in the first quarter (next year), but I don’t think it is necessary to rule out a raise in the first quarter.” Regarding the observation that it would be difficult to raise an additional interest rate ahead of the presidential election in March next year, he said, “The base rate is judged by looking at the financial and economic situation. It is not advisable to consider politically the timing of the base rate hike,” he said.
Financial markets, such as bonds, see a strong possibility of further hikes in the first and third quarters of next year.
Jina Kim, a researcher at IBK Investment & Securities, said, “We expect the base interest rate to return to the pre-pandemic level through an increase in the first quarter of next year. . Kim Ji-man, a researcher at Samsung Securities, also said, “Considering the MPC’s stance on interest rate normalization, the normalization of the base rate is expected to continue for a while.