Bank of Korea expected to join global wave of rate hikes

Bank of Korea Governor Lee Ju-yeol speaks during a press conference at its headquarters in Seoul, June 24. Yonhap

Six countries from South Africa and Eastern Europe raise key rates

By Lee Min-hyung

With a growing number of emerging countries preemptively increasing their key interest rates, Korea is also under growing pressure to jump on the bandwagon amid lingering inflationary fears.

Increasing concerns over inflation is cited as one of the key reasons behind the global rate hike momentum. Major economies abroad are also sending repeated signals to speed up their timeline for monetary tightening, underscoring the need to brace for a post-pandemic economic recovery.

A group of six emerging countries in South America and Eastern Europe have so far increased their base rates since the beginning of this year. They are Mexico, Brazil, the Czech Republic, Hungary, Turkey and Russia.

Even as major economies ― such as the United States and China ― remain cautious over revising their monetary policies in the short term, more emerging countries will seek to hike base interest rates this year to preemptively deal with a rapid rise in consumer prices, according to economists here.

The Bank of Korea (BOK) is also taking the rate hike seriously, and the general consensus is that the central bank will raise the country's record-low benchmark rate at least once in the fourth quarter. The BOK has maintained the key rate at a record-low 0.5 percent since May of last year amid the economic doldrums caused by the COVID-19 pandemic.

“We need to normalize the monetary easing policy at an appropriate time before the end of this year,” BOK Governor Lee Ju-yeol told reporters during a recent press conference.

The BOK's monetary policy has so far been in line with that of the Fed. But Lee also hinted at the possibility that the monetary authorities here will increase the key rate before any action by the Fed, whose open market committee said recently that it could raise the key rate as early as the second half of 2022.

This increases the likelihood of the BOK raising the key rate too. The Korean economy remains vulnerable to post-pandemic inflationary fears. The government and financial authorities here are issuing repeated warnings over debt-fueled investments. Household debt has been rising sharply in recent years amid super-low interest rates.

Household debt reached 1,765 trillion won ($1.56 trillion) as of the end of the first quarter, up 9.5 percent year-on-year, according to data from the BOK. The increase came as a result of a year-long buying spree of apartments and stocks, with more people particularly in their 30s purchasing assets to hedge risks against the depreciation of the local currency.

“Emerging countries, which were previously expected to freeze their key rates this year, will adjust their policy towards a rate hike, amid global inflationary pressure,” NH Investment & Securities economist Shin Hwan-jong said.

Yonsei University economist Sung Tae-yoon said, “The U.S. and emerging countries are sending signals of interest rate increases amid inflationary pressure, but what is much more important for the BOK is the level of price changes here,” he said.

Treasury bond rates here are also rising sharply in line with the growing likelihood of the BOK's rate hike. As of Monday, the interest rate on three-year treasury bonds reached 1.47 percent, the highest since Nov. 25, 2019. The interest rate on five-year treasury bonds also rose to the highest level in more than two years at 1.793 percent.