The Bank of Korea Holds Base Rate at 0.5%... "High Growth Uncertainty and Nationwide Housing Price Increase" (Comprehensive)

Bank of Korea October Monetary Policy Committee Meeting

On the morning of the 14th, Lee Ju-yeol, Governor of the Bank of Korea, presided over the Financial Monetary Policy Committee's plenary meeting held at the Bank of Korea in Jung-gu, Seoul, and struck the gavel.

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] The Bank of Korea has once again kept the base interest rate unchanged. Although downward pressure on the economy due to the impact of the novel coronavirus disease (COVID-19) remains, concerns over side effects such as rapid asset price increases appear to have prevented further cuts to the historically low base interest rate.

The Monetary Policy Board of the Bank of Korea held a monetary policy meeting on the 14th and decided to keep the base interest rate at 0.50% per annum. Since lowering the base rate to 0.50% in May, the Bank of Korea has maintained this rate for five consecutive months. In the monetary policy statement, the board said, "The domestic economy is expected to show a moderate recovery mainly driven by exports, but uncertainty about the growth path remains high," and "This year's gross domestic product (GDP) growth rate is expected to generally align with the August forecast of -1.3%." It also added, "Household loans have increased, and housing prices have continued to rise both in the Seoul metropolitan area and other regions," indicating significant concern over rising home prices.

The market expects the Bank of Korea to keep the base interest rate unchanged for an extended period. While some voices call for an 'exit strategy,' including interest rate hikes to curb housing price overheating and withdraw liquidity, the likelihood of such measures being implemented soon is slim. Instead of raising the base rate, the Bank of Korea plans to continue unconventional monetary policies such as government bond purchases.

Interest Rate Freeze Unavoidable Until Next Year

According to Trading Economics, a global macroeconomic data analysis firm, the Bank of Korea is expected to keep the base interest rate unchanged through this year and maintain the 0.50% rate until the end of next year at the earliest. Rate hikes are anticipated to begin in 2022.

Amid the resurgence of COVID-19 and other factors, the domestic economy is showing a slow recovery trend. The Monetary Policy Board stated, "Although export sluggishness has eased, private consumption remains weak due to the resurgence of COVID-19, facility investment recovery is constrained, and construction investment continues to adjust." The employment situation remains poor with a significant decline in the number of employed persons, and export volatility is expected depending on the global COVID-19 situation, all of which pose downside risks to the economy.

The consumer price inflation rate rose to around 1% due to a sharp increase in prices of agricultural, livestock, and fishery products caused by typhoons and monsoon rains. The board noted, "Consumer price inflation and core inflation are expected to remain in the low 0% range for the time being due to continued declines in international oil prices and low inflationary pressure from the demand side."

Youngmoo Cho, a research fellow at LG Economic Research Institute, said, "The prerequisite for raising interest rates is that the economy can withstand the shock of rate hikes," adding, "Since the crisis is not over, rates should remain unchanged for the time being." The financial and foreign exchange markets are stable, so the need for additional easing policies is low. However, he pointed out that it is time to consider remaining options, saying, "We need to think about what measures we can take, as other countries have implemented negative interest rates and other policies."

Side Effects of Low Interest Rates Emerge... Calls for 'Exit Strategy' Consideration

A representative side effect of the ultra-low interest rate policy is the concentration in asset markets. Economic agents borrowing at low rates have invested mainly in stocks and real estate, driving up prices. Last month, household loans across all financial sectors increased by nearly 11 trillion won. The ongoing financial support policies, such as low-interest loans and interest deferrals, have led to a surge in so-called 'zombie companies.' According to the Bank of Korea's Financial Stability Report, the proportion of zombie companies is expected to exceed 20% this year, a sharp increase from 14.8% last year. Zombie companies are defined as those with an interest coverage ratio below 1 for three consecutive years, meaning they cannot cover interest expenses with operating profits.

Donghyun Ahn, a professor of economics at Seoul National University, said, "I believe the discussion on normalizing interest rates should start immediately," adding, "If low interest rates have no effect but only side effects, it is time to consider when to reverse the rates." However, he cautioned, "If the market receives a message that monetary tightening is starting, it could cause shocks, and corporate investment and consumption may contract."

This content was produced with the assistance of AI translation services.