Fading August Rate Hike Speculation... Possibility of Increase Within the Year Remains High

Early rate hike canceled amid 4th wave,

but not enough to damage economic recovery

BOK maintains 4% growth forecast

Concerns over side effects of ultra-low interest rates including 1,765 trillion won household debt

BOK may raise rates at October Monetary Policy Committee

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] The Bank of Korea's Monetary Policy Committee on the 15th, as expected, once again kept the base interest rate unchanged, but there is a view that the timing of a rate hike has been delayed by one step. The rapidly increasing COVID-19 cases this month have emerged as a variable for rate hikes. The prospect that it will be difficult to raise rates at least in the third quarter is gaining credibility. To raise rates, it must be confirmed that the COVID-19 outbreak has subsided and the economic shock is not severe, but the prevailing view is that it is difficult to calm the situation in the short term. The BOK plans to monitor the spread of COVID-19 and its economic impact until next month.

Rate hike in Q3 pushed back due to COVID-19 spread

Just half a month ago, inside and outside the BOK, the possibility of a rate hike in the third quarter was weighted. The possibility of a rate hike in August was high, and some even suggested a July rate hike. This was because the recovery speed was so fast that concerns about overheating the economy arose, as vaccination progressed rapidly mainly in advanced countries. BOK Governor Lee Ju-yeol also made clear remarks about a rate hike within the year in his anniversary speech and inflation briefing. The BOK and the government jointly worked to dispel controversies over conflicting monetary and fiscal policies. This was interpreted as the government supporting a rate hike within the year.

However, COVID-19 became a stumbling block. Since July, the situation reversed rapidly, with daily new confirmed cases exceeding 1,600, accelerating the spread. Considering the increased burden on self-employed people who have endured for more than a year by borrowing, raising rates has become cautious.

Professor Donghyun Ahn of Seoul National University’s Department of Economics said, "If the worst situation of continuous COVID-19 spread continues, a rate hike within the year may become difficult," adding, "Whether COVID-19 becomes a short-term or medium-to-long-term variable is a key factor."

Concerns over ultra-low interest rate side effects revive 'October hike' theory

The market expects that the BOK will not decide on a rate hike even at the August Monetary Policy Committee and will only make a judgment in October. It is said that the BOK will review the COVID-19 situation and its impact, and only after releasing the revised economic outlook on the 26th of next month will it consider interest rates.

Experts, however, believe that the 4th wave of COVID-19 will not seriously damage the economic recovery trend. There is a learning effect regarding COVID-19, and large-scale vaccinations are scheduled in the third quarter. Cases of COVID-19 progressing to severe illness after vaccination are also few. Citigroup judged that even if the Korean government strengthens social distancing measures, consumption is generally in a recovery phase, and Korea's economic growth rate is still likely to exceed 4%.

Above all, the side effects of ultra-low interest rates, such as household loans reaching 1,765 trillion won and the concentration in real estate and stocks, also support the possibility of a rate hike within the year. The BOK pointed out in last month's Financial Stability Report that "Korea's financial imbalance is at its most vulnerable level since the financial crisis." In the first half of this year, household loans in the banking sector increased by more than 41 trillion won, marking the largest increase ever.

Professor Seongin Jeon of Hongik University’s Department of Economics said, "COVID-19 volatility causes problems in some sectors, such as dining, sports, and cultural industries, but it does not significantly affect export manufacturing, which is a major pillar of our economy," adding, "The global economic recovery does not seem to be particularly stalled due to the Delta variant." He further emphasized, "Since inflation is rising mainly in the U.S., the shock caused by quarantine measures should be addressed by fiscal policy, not by monetary policy that affects the entire economy."

Recently, the sharp rise in oil and raw material prices, further fueling inflation, is also a burden for the BOK.

If the BOK raises rates, it will be the first among major Asian countries to do so. The Reserve Bank of New Zealand (RBNZ) has decided to abruptly stop bond purchases, which were part of its quantitative easing (QE) policy, starting from the 23rd. Although the base rate (0.25%) was kept unchanged, the suspension of bond purchases is seen as a signal for a rate hike. The Reserve Bank of Australia (RBA) also decided on the first step of tapering (reducing asset purchases) on the 6th.

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