Faster-than-Expected Economic Rebound... Increasing Pressure for Interest Rate Hikes

If Expected Inflation Exceeds 2%
Future Base Rate Hikes Inevitable

[Asia Economy Reporter Jang Sehee] Domestic export and production indicators have been partially revised upward, drawing attention to the timing of interest rate hikes. As the pace of economic rebound accelerates beyond expectations, there are forecasts that interest rate hikes could also be brought forward.

According to the Korea Financial Investment Association as of 10:47 a.m. on the 31st, the 10-year government bond yield is recorded at 2.049%. Although it has fallen 0.68% compared to the previous day, it still remains above 2%. The 10-year government bond yield closed at 2.063% annually, up 8.3 basis points (1bp=0.01 percentage points) from the previous day. The 3-year bond also rose 3.6bp to 1.155%, and the 2-year and 5-year bonds closed at 0.943% and 2.063%, up 2.2bp and 7.7bp respectively. As U.S. Treasury yields rise, domestic government bond yields are also moving in tandem.

The Bank of Korea has stated that it has no plans to revise its monetary policy stance, but experts say that if expected inflation exceeds the 2% range due to rising U.S. Treasury yields, future base rate hikes will be inevitable. Professor Andonghyun of Seoul National University’s Department of Economics pointed out, "If signs of economic recovery accelerate, expected inflation will rise accordingly," adding, "Ultimately, if interest rates are raised, companies’ capital procurement costs increase, leading to a contraction in investment." He also noted, "There will be some contraction effect on consumer activities as well."

If growth rates rise due to economic recovery, the timing of interest rate hikes is also expected to be brought forward. Bank of Korea Governor Lee Ju-yeol recently hinted at the possibility of upward revisions to economic growth forecasts. Professor An said, "Since the current interest rate level in our country is very low, some degree of increase is possible," but added, "Because the interest rate level is so low, the relative shock may be less."

Meanwhile, the Bank of Korea has maintained a freeze on the base rate for nine months after lowering it from 1.25% annually to 0.75% in March last year due to the COVID-19 crisis, and then further cutting it to a record low of 0.5% annually in May last year.

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