Bank of Korea Holds Interest Rate Steady... "Let's Monitor the COVID-19 Pandemic Further" (Comprehensive)

On the morning of the 15th, Lee Ju-yeol, Governor of the Bank of Korea, presided over the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, and struck the gavel.

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea has kept the base interest rate steady at 0.50% per annum. Although an interest rate hike was anticipated within the year, the fourth wave of the COVID-19 pandemic has put a brake on the Bank of Korea's plan for an early rate increase. With 1,600 new confirmed cases reported on the day, the Bank of Korea is expected to monitor the situation further before raising rates.

On the 15th, the Monetary Policy Committee of the Bank of Korea held a meeting on monetary policy direction and decided to maintain the base interest rate at 0.50%. This marks the ninth time the rate has been held steady since the "big cut" on March 16 last year (from 1.25% to 0.75%) and an additional rate cut in May last year.

In the monetary policy direction statement, the committee said, "Although the domestic economy is expected to continue its recovery trend and inflation is likely to remain elevated for some time, uncertainties related to the spread of COVID-19 persist, so the accommodative monetary policy stance will be maintained."

However, the possibility of an interest rate hike within the year still appears to be present. The committee forecasted, "This year's economic growth rate is expected to be around 4%, as projected in May." They cited continued strong exports and facility investment, a recovery trend in private consumption, and ongoing improvements in employment conditions as reasons.

The prolonged ultra-low interest rate environment has led to a surge in household loans, and rising inflation also supports the case for a rate hike within the year. The committee stated, "Consumer price inflation is expected to exceed the May forecast path and remain in the low to mid-2% range for some time," adding, "Core inflation (excluding food and energy prices) is also expected to gradually rise to the mid-1% range."

Household debt exceeding 1,700 trillion won and asset concentration phenomena are also cited as reasons for a rate increase. The committee emphasized, "Household loans have continued to increase sharply, showing the largest growth in the first half of the year, and housing prices have maintained a strong upward trend in both the metropolitan area and provinces," adding, "We will assess the COVID-19 developments, changes in growth and inflation trends, and accumulated financial imbalance risks to determine whether to adjust the degree of monetary easing."

So far, the most likely scenario is that the interest rate will remain at 0.5% until August, followed by two 25 basis point hikes at the October meeting and the meetings in January and February next year. Meanwhile, after the Bank of Korea kept the base rate unchanged, the 10-year government bond yield fell below 2% during the session. The 3-year government bond yield also dropped to around 1.37%. This is due to reduced expectations for an early rate hike amid concerns over the Delta variant and the increased appeal of bonds as safe-haven assets, which pushed bond prices up. Bond yields move inversely to bond prices.

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