Government Raises Social Distancing to Level 4... Will Bank of Korea's Interest Rate Hike Schedule Be Affected?

"If Private Consumption Shock Is Confirmed, Pressure for Interest Rate Hike Will Increase"

Photo by Moon Honam / Korean Bank 자료사진 / Moon Honam munonam@

[Asia Economy Reporter Kim Eun-byeol] As domestic COVID-19 cases surge, there is a growing expectation that the Bank of Korea's timetable for raising the base interest rate could be affected. Since the government has decided to raise the social distancing level in the metropolitan area to Level 4 for two weeks, the impact on the economy, including private consumption, cannot be ignored.

According to market experts on the 9th, if it is confirmed that the strengthening of social distancing delays economic recovery, the Bank of Korea may adjust the pace of monetary policy normalization accordingly. Initially, the market widely expected that the Bank of Korea could implement its first rate hike as early as August or as late as October. There was a scenario that if two or more dissenting opinions for a rate hike emerge at the Monetary Policy Committee meeting on the 15th, an immediate rate hike in August could be possible.

However, with the rapid increase in COVID-19 cases and the consequent elevation of social distancing levels, it has become more likely that dissenting opinions for a rate hike will appear only after observing the impact on economic indicators such as private consumption. The Bank of Korea is scheduled to release a revised economic outlook on the 26th of next month, and since this outlook is expected to reflect the recent COVID-19 resurgence and the government's consumption stimulus policies, the Bank may decide after monitoring the situation. If this happens, an August rate hike could be difficult, and at most, one rate hike might be possible within this year. Assuming the summer COVID-19 resurgence is contained, there is a scenario of a rate hike in October or November.

Gong Dong-rak, an economist at Daishin Securities, said, "It is not entirely off the table to raise rates in August right now, but the elevation of social distancing levels will have some impact on the rate hike schedule. If it is confirmed through indicators that economic activity has contracted due to the Level 4 elevation and various indicators worsen, it could be very burdensome for the Bank of Korea to proceed with the next steps."

Typically, when a central bank starts raising rates after a crisis, it is interpreted not as a one-time increase but as signaling a 'policy stance change' toward tightening gradually. However, with the severe resurgence of COVID-19 causing shocks to self-employed individuals, and their debts already increasing, it could be burdensome to indicate a shift to a tightening policy stance. Analyst Gong added, "If the economic shock from this COVID-19 resurgence is reconfirmed, ultimately, we may have to be satisfied with just one rate hike during Governor Lee Ju-yeol's term at the Bank of Korea."

Meanwhile, as the domestic COVID-19 resurgence continues, the Korean won has been weakening for several days. As of 9:48 a.m. today at the Seoul foreign exchange market, the won-dollar exchange rate is trading at 1,147.96 won. The won-dollar rate started at 1,147.5 won, up 2.5 won, and has been fluctuating around 1,147 won. The exchange rate has continued its upward trend after hitting a new high the previous day, marking the highest level in nine months.

Experts cite the growing concerns over the COVID-19 resurgence domestically, along with increased risk aversion toward emerging market currencies and stocks, as reasons for the won's weakness against the dollar. Not only domestically but also internationally, as the COVID-19 Delta variant spreads, funds are flowing into safe-haven assets.

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