Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Bank of Korea raises key rate for 1st time in 3 years
Bank of Korea Governor Lee Ju-yeol speaks during a press conference after holding a rate-setting meeting at its headquarters in Seoul, Thursday. Courtesy of Bank of Korea
By Lee Min-hyung
Governor Lee hints at another rate hike later this year
By Lee Min-hyung
The Bank of Korea (BOK) raised its key interest rate by 25 basis points to 0.75 percent on Thursday, in a move to keep inflation in check and rein in soaring household debts.
This is the first time that the BOK has adjusted the key rate after slashing it to a record low of 0.5 percent in May 2020 amid growing fears over the first wave of the COVID-19 pandemic. It is the first rate hike since November 2018.
“The rate hike is our first step toward the goal of alleviating the financial imbalance, even if it is a time-consuming job,” BOK Governor Lee Ju-yeol told reporters after holding a monetary board meeting.
The increase in the benchmark rate did not give an immediate shock to the bond market and the won-dollar exchange rate. The 10-year government bond yield dropped by 0.8 basis points to end at 1.928 percent Thursday from the previous day. The won-dollar exchange rate inched up by 2.4 won to finish at 1,170.5 won.
The head of the central bank also called for the need to increase the rate further in line with any possible policy change of the U.S. Federal Reserve.
“We need to take into consideration how seriously the coronavirus spread will impact the economy and whether the Fed will change its monetary policy before deciding on the specific timeline for our additional adjustment of the key rate,” he said. “As always, we should not be hasty, but it does not mean the central bank will delay the move.”
The remark came amid an increasing possibility of the U.S. Fed's start of tapering no later than the end of this year. Chances are the Korean central bank will raise the key rate once more sometime in October or November in tandem with any possible hawkish gestures from the Fed.
“Given the economy and price levels, the key rate here still remains low, so we are going to start normalizing our monetary policy in accordance with the pace of economic recovery,” he said.
The Korean economy is still grappling with the aftermath of the fourth wave of the virus, but the BOK predicted that the recent spread of Delta variants would not pose a serious threat to the economy.
Export recovery and expansionary fiscal policies will offset the virus-induced slump in domestic consumption, and the economy is expected to be on path to achieve stable rebound this year, Lee said.
The BOK also maintained Korea's 2021 GDP growth outlook at 4 percent despite lingering uncertainties surrounding the virus spread. It also kept the 2022 GDP growth projection at 3 percent. It raised its inflation outlook to 2.1 percent from 1.8 percent forecast in May.
The Financial Services Commission expected the rate hike to help ease growing household debts, and reiterated its willingness to curb banks' lending.
With the nation's household debts setting a new high on each quarter, watchdogs are reinforcing regulatory moves by forcing banks to reduce their loan offering to households. On Thursday, authorities urged online e-commerce sites to stop accepting credit card payment when selling stock gift certificates issued by securities firms here.
Economists said the central bank would increase the base rate at least once more before the end of 2021.
“The U.S. Fed is likely to start tapering its bond purchases sometime around November, and this will press the central bank to raise the key rate at a time when prices here are rising and the housing market continues to show signs of overheating,” Sejong University economist Kim Dae-jong said.