Bank of Korea set to freeze key rate ahead of presidential election

Bank of Korea Governor Lee Ju-yeol speaks during the G20 Finance Ministers and Central Bank Governors meeting held online, Friday. Courtesy of Bank of Korea

By Lee Min-hyung

The Bank of Korea (BOK) is set to freeze its key rate during an upcoming rate-setting meeting, as household debt has risen sharply despite growing inflationary pressure, analysts said Sunday.

The Korean central bank has already increased the benchmark rate three times since August 2021, as part of a preemptive move to bring rising prices and financial imbalance under control. Nonetheless, market experts argue that the BOK would take a wait-and-see approach this time ahead of the presidential election and the U.S. Fed's planned rate hike in March.

The aggressive rate hikes by the BOK have kept coming, thereby increasing the growing financial burden to households. If the central bank does so once more at such a rapid pace, a growing number of the self-employed are also feared to struggle tremendously, data shows.

According to data from the Korea Economic Research Institute, each household will have to pay 876,000 won ($732) more for interest on average each year if the key rate rises by 1 percentage point. The self-employed and small business owners ― hit hardest by declining sales due to social distancing ― also have to take the financial hit of more than 1.6 million won each year under the same scenario.

“Given that the BOK shared its plans to thoroughly monitor the effect of its rate hike in January, it will not engage in a consecutive rate hike during the Feb. 24 rate-setting meeting,” eBest Investment & Securities economist Choi Kwang-hyuk said. “The BOK's rate hikes in November and January was part of a preemptive action to control rising prices, but it is unlikely to do so this month to control the pace of its monetary policy shift.”

The outlook comes at a crucial time as the Fed is also scheduled to raise its key rate next month for the first time in about two years after cutting it to a near-zero figure amid the outbreak of the COVID-19 pandemic.

The Fed is widely expected to increase it by as much as 50 basis points at some point during the upcoming Federal Open Market Committee meeting that will start on March 15 and last for two days.

Considering that the BOK's policy stance has long moved in tandem with that of the Fed, the upcoming decision by the U.S. monetary authority will likely stimulate the Korean central bank's additional rate hike after March.

“Any prejudgment regarding the Fed's monetary policy will end up increasing risks at a time when the financial market here and abroad is faced with widening volatility due to a series of issues,” IBK Investment & Securities analyst Jeong Yong-taek said. “It would be better to check the Fed's policy shift first before making any preemptive move amid high volatility on the global financial market.”