'COVID-19 4th Wave' Hampers Economic Recovery in Gyeonggi... Base Interest Rate Held at 0.50% (Comprehensive)

9th Consecutive 'Base Interest Rate Freeze' Amid 4th Wave of COVID-19
Rate Hike Within the Year May Be Difficult Under Worst-Case Scenario

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea has decided to keep the base interest rate unchanged. This decision was made considering that it is too early to raise rates amid the economic recovery from the fourth wave of COVID-19.

On the 15th, the Bank of Korea held a Monetary Policy Committee meeting at its headquarters in Seoul and maintained the base interest rate at a record low of 0.50% per annum. This marks the ninth time the rate has been held steady, following July, August, October, and November of last year, as well as January, February, April, and May of this year.

This decision appears to take into account the fact that new COVID-19 cases have remained in the 1,000s for a week. If the COVID-19 situation prolongs more than expected, the pace of economic recovery could be slower than anticipated. In particular, if the domestic fourth wave of COVID-19 intensifies, it could restrict the recovery of domestic demand, especially in face-to-face service industries. According to the government's 'Second Half Economic Policy Direction,' private consumption is expected to increase by 2.8% this year, marking a rebound, but this is only about half the recovery level of 2020 (-5.0%).

On the 7th, the Korea Development Institute (KDI) stated in its 'Economic Trend Report' that "due to the spread of variant coronaviruses and the sharp increase in confirmed cases, economic uncertainty remains high," and "with the number of COVID-19 cases rising sharply since the end of June, there is a possibility that economic recovery may be delayed."

In this regard, Professor Andonghyun of Seoul National University's Department of Economics said, "We need to see whether the COVID-19 spread variable shifts from a short-term to a medium- to long-term factor," adding, "Assuming the worst-case scenario where COVID-19 continues until the end of this year, it may be difficult to raise interest rates within the year." This means that if the spread of COVID-19 continues, the recovery of the real economy could slow down.

This aligns with market expectations. According to a recent survey conducted by the Korea Financial Investment Association targeting bond experts, 89 out of 100 respondents expected the base interest rate to remain unchanged.

However, considering the worsening financial imbalances and rising prices, expectations for additional measures such as interest rate hikes remain. The surge in household debt, which has exceeded 1,700 trillion won, and the concentration of asset prices in real estate are cited as reasons for raising the base interest rate. Additionally, inflationary pressures are increasing, with the U.S. Consumer Price Index (CPI) rising by 5.4% compared to the same period last year in June. Relatedly, Bank of Korea Governor Lee Ju-yeol stated on the 24th of last month that "the accommodative monetary policy should be normalized at an appropriate time within the year."

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