The Bank of Korea Holds Base Interest Rate at 0.5% for 8th Month... Considering Economic Recovery and Real Estate Overheating (Comprehensive)

Considering Low-Interest Rate Side Effects Like Household Debt Increase and Real Estate Price Surge
Fed Monetary Policy Direction... Chairman Powell "Will Not Raise Rates in the Near Future"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea (BOK) decided to keep the base interest rate unchanged at 0.5% during the Monetary Policy Committee meeting held on the 15th. While maintaining a monetary easing stance to support economic recovery, the decision appears to consider side effects of low interest rates such as the increase in household debt and overheating of the real estate market. Additionally, the Federal Reserve's (Fed) monetary policy of maintaining near-zero interest rates was also evaluated as a factor behind the decision to hold rates steady.

On the day, the BOK held the Monetary Policy Committee plenary session at its headquarters and kept the base rate at a record low of 0.50%. This marks the eighth consecutive month of holding the rate steady after lowering it by 0.25 percentage points in May.

To respond to the economic crisis caused by the spread of COVID-19, the BOK lowered the base rate from 1.25% at the beginning of this year by 0.50 percentage points in March and by 0.25 percentage points in May, bringing it down to a historic low of 0.50%.

If the BOK maintains the current stance of holding the base rate steady through the end of the year, it will break the record for the longest period of rate stability. Previously, the BOK lowered the base rate to 1.25% in June 2016 and held it steady for a record 17 months before raising it by 0.25 percentage points in November 2017.

This outcome aligns with market expectations. According to a survey conducted by the Korea Financial Investment Association from the 4th to the 7th among 200 bond industry professionals, all 100 respondents expected the base rate to remain unchanged this month. The analysis is that, like other major countries, the BOK will continue to hold rates steady to support the economic recovery trend.

With the base rate lowered, liquidity in the market remains abundant. According to "Monetary and Liquidity Conditions in November 2020," the money supply (M2) in November was KRW 3,178.4 trillion, an increase of KRW 27.9 trillion compared to the previous month (KRW 3,150.5 trillion). The released liquidity is evaluated to have significantly contributed to raising asset prices such as real estate.

Since the BOK previously stated it would maintain an accommodative monetary policy until the COVID-19 situation improves and economic recovery is evident, the current ultra-low interest rate stance is expected to continue through the year. Fed Chair Jerome Powell said on the 14th (local time), "When the time comes to raise rates, we will definitely do so, but that time is not very near."

In this regard, Professor Kim Soyoung of Seoul National University’s Department of Economics said, "With a lot of liquidity flowing into the market, asset prices have risen too much," adding, "An interest rate hike will be possible only when it is possible to judge that the economy is recovering."

Professor Jung Jinwook of Yonsei University’s Department of Economics pointed out, "It is truly an unavoidable situation where low interest rates must be maintained reluctantly," and added, "Raising rates in the current situation would incur much greater costs." Professor Jung predicted that the base rate freeze would continue for a long time, saying, "The BOK’s monetary policy goal is price stability, and unless prices rise, rates cannot be raised."

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