When Will South Korea Raise Interest Rates?…Academia Says 'As Early as Q3' vs. Securities Industry 'Next Year'

Economic Recovery: The Key Is Whether It Continues Steadily in the Second Half

[Asia Economy Reporter Kim Eun-byeol] As the vaccination rate accelerates and the economy recovers, causing prices to surge, domestic interest rate hikes are coming into view. Last month, the domestic consumer price index rose by 2.6%, far exceeding the Bank of Korea's inflation target of 2%, and the annual inflation rate is expected to reach the high 1% range. Economists and researchers predict that South Korea's interest rate hike could be implemented as early as the third quarter. However, the securities industry sees the earliest possible rate hike as next year, showing a difference of opinion with academia and others.

According to the Korea Institute of Finance on the 7th, Senior Researcher Park Sung-wook recently stated in the report titled "The Need for Gradual Base Rate Hikes Corresponding to the Degree of Economic Improvement" that "If the current economic improvement trend continues, it is necessary to start raising the base rate in the second half of the year and orderly adjust the degree of monetary policy easing according to the extent of economic improvement." He explained that maintaining the current ultra-low interest rates despite economic improvement could lead to price instability due to demand exceeding production capacity and could stimulate asset markets, expanding financial imbalances. He expressed concern that "a delayed large-scale rate hike could cause greater shocks." The real interest rate, calculated by subtracting the expected inflation rate from the Bank of Korea's base rate (0.5% per annum), fell from -0.45% (expected inflation rate 1.7%) at the end of 2019 before the COVID-19 crisis to -1.1% in May last year and -1.7% in May this year. This indicates that the side effects of ultra-low interest rates are increasing as real interest rates remain negative.

In academia, there is a forecast that discussions on raising the base rate could begin in earnest from the Bank of Korea's Monetary Policy Committee meeting in August. Bank of Korea Governor Lee Ju-yeol said after freezing rates at the end of last month, "We will not rush to normalize interest rate policy, but I think we should not miss the timing," and added, "Please consider this along with the term 'for the time being'." Academics interpret Governor Lee's message as hawkish (favoring monetary tightening) and suggest that even if the current economic recovery situation is maintained in the second half of the year, a rate hike could be initiated.

Professor Ahn Dong-hyun of Seoul National University’s Department of Economics said, "Lockdowns in the US and Europe have almost been lifted, and herd immunity is becoming visible, so our exports could increase further, raising the growth rate," adding, "The possibility of advancing South Korea's interest rate hike to the third quarter cannot be ruled out."

However, the securities industry generally views the possibility of a rate hike within this year as low, reflecting an assessment that economic recovery has not yet fully materialized. Researcher Kim Myung-sil of Shinhan Financial Investment said, "The speed of economic recovery in the US is faster than in South Korea," and evaluated, "It is not a pace of economic recovery that justifies an interest rate hike first in South Korea." Analyst Gong Dong-rak of Daishin Securities also said, "Considering base effects and others, it is difficult to judge this as a proper recovery," and added, "It seems that rates can be raised only in the second half of next year."

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