[Urgent Economic Recovery Diagnosis] "Tightening Possible Only After Achieving Herd Immunity... Base Rate Hike Expected Early Next Year"

Interview with Four Macroeconomic Experts

Clear signs of economic indicator recovery in Gyeonggi Province, but

uncertainties remain such as vaccine supply and COVID-19 resurgence

Private consumption still below pre-COVID-19 levels poses an obstacle

Considering side effects of ultra-low interest rates, some suggest a rate hike once in the second half of the year

[Asia Economy Reporter Kim Eunbyeol] As the faster-than-expected economic recovery is confirmed numerically in South Korea and the United States, attention is focused on the timing of withdrawing the 'money printing' that has continued for over a year. South Korea's GDP growth rate is expected to rise up to 4% this year, and in the first quarter, GDP recovered to pre-COVID-19 levels. Last month, consumption increased at the largest rate in seven months, and production continued to grow, expanding the economic recovery trend, which could accelerate tapering and even the timing of interest rate hikes.

However, experts say the situation is different this time. Since last year's economic contraction was not caused by foreign exchange or financial issues but by the infectious disease crisis, having 'confidence' that COVID-19 will not shock the real economy is crucial.

According to an urgent diagnosis conducted by Asia Economy Newspaper on the 30th with experts from economics, finance, capital markets, real estate, and corporations, experts agreed that after herd immunity is formed around November this year, they will consider raising the base interest rate and may raise it early next year. However, considering the side effects of prolonged ultra-low interest rates, such as inflation exceeding 2% and asset market concentration, some opinions suggest the need for one interest rate hike in the second half of this year.

Confirming vaccination rates is essential for confidence in economic recovery... Many sectors have not recovered to pre-COVID-19 levels

Looking at the indicators alone, the economic recovery trend is already clear. However, uncertainties such as vaccine supply and concerns about COVID-19 resurgence are factors not captured in economic indicators. Park Sungwook, Senior Research Fellow at the Korea Institute of Finance, said, "If the base interest rate is raised based only on indicators, a sudden COVID-19 resurgence could force policy reversal," and added that it is still not easy to raise the base rate to secure trust in monetary policy. He said, "I think tightening will be postponed until there is some confidence in vaccine supply."

He also pointed out that private consumption still remains below pre-COVID-19 levels as an obstacle. According to the Bank of Korea, private consumption in the first quarter was at 94.5% compared to the fourth quarter of 2019, below 100%. The International Monetary Fund (IMF) also evaluated South Korea as facing "one challenge after another" on the 29th (local time), stating, "Exports have rebounded, but services and consumption remain below pre-COVID-19 levels," and explained, "Fiscal and monetary policies are maintained due to K-shaped recovery and uncertainties." The IMF also advised, "Credit support should be maintained until recovery signals appear in more sectors, and gradual reduction is appropriate." From a corporate perspective, it is also difficult to discuss tightening. Choo Kwangho, Director of Economic Policy at the Korea Economic Research Institute under the Federation of Korean Industries, said, "Many sectors, including small business owners and consumer industries, are struggling," and "It is premature to discuss raising the base interest rate."

Household debt approaching 100% of GDP is a headache

The biggest side effect emerging from the prolonged ultra-low interest rate policy is 'debt.' As more people borrow not only for living expenses but also for investment, asset prices have skyrocketed. Household debt has surged to nearly the size of the country's GDP. However, opinions differ on how to respond. Lee Suwook, Director of the Real Estate Market Research Center at the Korea Research Institute for Human Settlements, said, "If interest rates are raised now, the rapidly increasing household debt could become a burden." Since 70% of mortgage loans are variable-rate loans, raising rates increases the burden on existing loans. Lee said, "If interest rates are raised considering only economic growth and inflation, the burden on borrowers will increase, which could be quite risky," adding, "As interest burdens increase, disposable income decreases, negatively affecting consumption."

On the other hand, Andonghyun, Professor of Economics at Seoul National University, said, "Considering the possibility of inflation due to the US-originated vaccine effect and the rapid rise in asset markets, it might be a method for Korea to raise the base interest rate once in the second half of the year and then adjust the pace." He added, "Raising rates from 0.5% to 0.75% will not suddenly shrink consumption or investment."

Inflation debate continues... Uncertainty over the presidential election also pointed out

Opinions on the consumer price inflation rate, expected to rise to the 2% range this month, varied among experts. Professor Ahn said, "Not only the base effect but also people tired of social distancing measures are increasing consumption," and added, "Considering the possibility of inflation, it is good to adjust the pace with a rate hike in the second half of the year."

On the other hand, some argue that the inflation rebound is temporary and that prices could return to a low-inflation state once fiscal stimulus is exhausted. Kang Hyunju, Research Fellow at the Korea Capital Market Institute, said, "The Federal Reserve focuses on disinflation, where prices fall below the target after fiscal stimulus is exhausted next year." Since there was a low inflation risk even before COVID-19, confirming inflation exceeding 2% is necessary before raising rates. He said, "Changing monetary policy retrospectively after confirming inflation will become a new trend."

Research Fellow Kang also viewed that raising rates in the first quarter of next year, after herd immunity is confirmed, is ideal. However, he noted, "The key is whether the Bank of Korea can raise rates without being influenced by the presidential election and the governor's term ending (end of March)," and predicted that if the timing of the first quarter rate hike is missed, it could be delayed until the third quarter of next year.

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