The Bank of Korea (BOK) raised its key interest rate by 0.25 percentage points to 0.75 percent Thursday to tame inflation, check soaring household debt and fight property speculation. The move means an end to 15 months of the record-low interest rate designed to minimize the fallout from the unprecedented COVID-19 pandemic.
The hike comes as no surprise, as the central bank has repeatedly stressed the need for a higher rate over the past several months. Given the country's financial and economic situation, the BOK could no longer delay the upward adjustment. An upbeat economic outlook has also had a positive effect on the move. The BOK has kept its 2021 growth projection at 4 percent, a robust rebound from last year's 0.9 percent contraction.
Following the outbreak of the coronavirus here, the central bank lowered its benchmark policy rate by to an all-time low of 0.5 percent in May last year. This accommodative money policy has greatly helped the country ride out the COVID-19 shock, but not without side effects. The consumer price index climbed 2.6 percent year-on-year in July, exceeding the BOK's inflation target of 2 percent for the fourth straight month. Household debt hit a record high of 1,805 trillion won ($1.54 trillion) on June 30, becoming a ticking time bomb.
Worse yet, excess liquidity created by monetary easing and fiscal expansion has flown rapidly into real estate and stock markets, forming asset bubbles. Skyrocketing housing prices have spiraled out of control, raising concerns about a potential burst of bubbles. The Moon Jae-in administration has failed to cool the overheated housing market despite a set of measures including higher property taxes and tighter control on mortgages.
Against this backdrop, ramping up the interest rate was inevitable. Moreover, BOK Governor Lee Ju-yeol hinted at an additional rate increase within this year or early next year. A one-time rate hike appears to be insufficient to address all the problems all at once.
It is important to take pre-emptive action in order to have desired results. In this sense, it is questionable that the interest increase was timely. Critics accused the BOK of taking only belated action. Now, the authorities should take more precautionary measures to ensure financial stability and attain sustainable economic growth.
It is also imperative to help all economic players adapt to higher interests and monetary tightening. Individual and corporate borrowers face growing interest burden. Low-income earners and the self-employed are suffering financial pinch amid the fourth wave of infections here. They feel deeper pain as financial regulators have begun to tighten loan provisions to individuals. Some banks are even refusing to provide loans for rental deposits. In this situation, it is necessary to work out proper steps to ease their credit crunch.