By Nam Hyun-woo
The Bank of Korea (BOK) raised its key interest rate to 1.5 percent from 1.25 percent Thursday, putting an end to an era of low interest rates.
In a widely expected move, the central bank decided to make the 0.25 percentage point hike at its Monetary Policy Board meeting, ending 16 months of a wait-and-see approach.
This was the first time the board has raised the key rate since June 2011, and the first during BOK Governor Lee Ju-yeol's tenure.
The rate hike will help take the steam out of soaring household debt, but at the same time it raises concerns thst heavily indebted households will have a harder time repaying their loans. The nation's household debt reached 1,420 trillion won ($1.3 trillion) at the end of September. The BOK expects households to sustain an extra interest burden of 2.3 trillion won with the rate increase.
Five months ago, Lee dropped hints at adjustments to the bank's monetary easing policy, and during last month's meeting the board had several minority opinions calling for a rate hike.
The move comes after the country's recent economic rebound. In the third quarter, Korea's GDP grew 1.4 percent from three months earlier, casting a rosy outlook for the BOK's 3 percent growth projection for this year.
"The Korean economy is sustaining a trend of solid growth in line with the potential growth rate, and the consumer price inflation rate is expected to near our target," Lee said after the rate-setting meeting.
"If the board had kept the base rate unchanged, the easing of the monetary policy would have expanded, causing a financial imbalance."
In a statement, the board said it "expects domestic economic growth will be slightly above the rate projected in October as consumption and facilities investment continue their trends of moderate improvement, and exports sustain their
buoyancy thanks largely to the acceleration of the global economic recovery and improved trade conditions with China."
In October, the BOK raised its growth outlook for this year from 2.8 percent to 3 percent. Following the central bank, the IMF and the OECD each inched up their growth projection for Korea this year to 3.2 percent, saying the country's export-driven economy will benefit from the up-cycle in global trade.
With favorable domestic and international outlooks, the BOK said the board will "maintain its accommodative monetary policy stance, while carefully judging whether it is necessary to adjust its stance further."
This is interpreted that the central bank will be slow in taking a hawkish stance.
"The rate is expected to remain unchanged in the first quarter of next year," KB Securities analyst Kim Sang-hoon said.
"The BOK needs one to two quarters to assess the impact of today's rate hike and the government's household debt measures."
In the decision-making process, board member Cho Dong-chul expressed his opposition to the rate increase, claiming the central bank should keep the rate at 1.25 percent for another month.
Some analysts expect Lee, whose term expires in March, is unlikely to make another move before handing over the post to his successor.
A potential key rate hike in the U.S. is also attributable to the BOK's move. The Federal Open Market Committee (FOMC) is expected to increase its key rate during a meeting scheduled for Dec. 12.
Analysts say the BOK raised its rate preemptively to keep it above the U.S. rate and prevent any foreign capital outflow.
However, Lee stressed "the FOMC's rate hike does not necessarily decide Korea's policy rate," adding the BOK considers the impact on the domestic economy, not the hike itself.
The Bank of Korea (BOK) raised its key interest rate to 1.5 percent from 1.25 percent Thursday, putting an end to an era of low interest rates.
In a widely expected move, the central bank decided to make the 0.25 percentage point hike at its Monetary Policy Board meeting, ending 16 months of a wait-and-see approach.
This was the first time the board has raised the key rate since June 2011, and the first during BOK Governor Lee Ju-yeol's tenure.
The rate hike will help take the steam out of soaring household debt, but at the same time it raises concerns thst heavily indebted households will have a harder time repaying their loans. The nation's household debt reached 1,420 trillion won ($1.3 trillion) at the end of September. The BOK expects households to sustain an extra interest burden of 2.3 trillion won with the rate increase.
Five months ago, Lee dropped hints at adjustments to the bank's monetary easing policy, and during last month's meeting the board had several minority opinions calling for a rate hike.
The move comes after the country's recent economic rebound. In the third quarter, Korea's GDP grew 1.4 percent from three months earlier, casting a rosy outlook for the BOK's 3 percent growth projection for this year.
"The Korean economy is sustaining a trend of solid growth in line with the potential growth rate, and the consumer price inflation rate is expected to near our target," Lee said after the rate-setting meeting.
"If the board had kept the base rate unchanged, the easing of the monetary policy would have expanded, causing a financial imbalance."
In a statement, the board said it "expects domestic economic growth will be slightly above the rate projected in October as consumption and facilities investment continue their trends of moderate improvement, and exports sustain their
buoyancy thanks largely to the acceleration of the global economic recovery and improved trade conditions with China."
In October, the BOK raised its growth outlook for this year from 2.8 percent to 3 percent. Following the central bank, the IMF and the OECD each inched up their growth projection for Korea this year to 3.2 percent, saying the country's export-driven economy will benefit from the up-cycle in global trade.
With favorable domestic and international outlooks, the BOK said the board will "maintain its accommodative monetary policy stance, while carefully judging whether it is necessary to adjust its stance further."
This is interpreted that the central bank will be slow in taking a hawkish stance.
"The rate is expected to remain unchanged in the first quarter of next year," KB Securities analyst Kim Sang-hoon said.
"The BOK needs one to two quarters to assess the impact of today's rate hike and the government's household debt measures."
In the decision-making process, board member Cho Dong-chul expressed his opposition to the rate increase, claiming the central bank should keep the rate at 1.25 percent for another month.
Some analysts expect Lee, whose term expires in March, is unlikely to make another move before handing over the post to his successor.
A potential key rate hike in the U.S. is also attributable to the BOK's move. The Federal Open Market Committee (FOMC) is expected to increase its key rate during a meeting scheduled for Dec. 12.
Analysts say the BOK raised its rate preemptively to keep it above the U.S. rate and prevent any foreign capital outflow.
However, Lee stressed "the FOMC's rate hike does not necessarily decide Korea's policy rate," adding the BOK considers the impact on the domestic economy, not the hike itself.
