Korea and New Zealand, Asia's First Rate Hike? ... 'House Prices VS Delta Variant' Dilemma

New Zealand Central Bank Rate Decision on 18th
Lockdown Due to Delta Variant Spread...Watch for Rate Hike to Control Inflation and Housing Prices

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] "Will interest rate hikes curb housing prices and inflation, or should ultra-low interest rates be maintained while closely monitoring the economic impact of the COVID-19 Delta variant?"

Due to the rapidly spreading COVID-19 Delta variant, central banks around the world, including the Bank of Korea, which were planning to raise benchmark interest rates, have found themselves in a dilemma. Although an interest rate hike is necessary as inflation and housing prices continue to rise amid a prolonged ultra-low interest rate environment near zero, the uncertain spread of the Delta variant is hindering central banks' decisions to raise rates.

According to Bloomberg and other sources on the 18th (local time), the Reserve Bank of New Zealand (RBNZ) will decide its benchmark interest rate at 11 a.m. Korean time. Initially, the financial market was 100% certain that the RBNZ would raise the benchmark rate from 0.25% to 0.50% early this week.

However, after New Zealand announced the reintroduction of lockdown measures the day before, the probability of a rate hike dropped to 60%. New Zealand Prime Minister Jacinda Ardern announced lockdown measures nationwide following the first COVID-19 case reported in Auckland in six months. New Zealand will enter the strongest Level 4 lockdown for at least three days starting on the 18th.

New Zealand has experienced significant increases in housing prices and inflation due to the sustained ultra-low interest rate policy since the COVID-19 outbreak, and its relatively successful quarantine measures have accelerated economic recovery, placing it in a situation similar to South Korea. New Zealand's Consumer Price Index (CPI) for the second quarter rose 3.3% year-on-year, exceeding the market forecast of 2.8%. New Zealand also ranked first in Bloomberg's 'Housing Bubble Ranking.'

If New Zealand raises interest rates despite imposing nationwide lockdowns due to the Delta variant, it indicates that inflation and housing price increases are considered as significant problems as the resurgence of COVID-19. If New Zealand raises rates on this day, it will be the first among major Asian countries to do so.

[Image source=Yonhap News]

The Bank of Korea is facing a similar dilemma. Considering the household debt problem, which has ballooned to 1,765 trillion won, and the rising trends in inflation and housing prices, the Bank of Korea sees the need to raise interest rates. Nevertheless, it remains uncertain whether the Monetary Policy Committee will raise rates at its meeting on the 26th. The Delta variant continues to spread domestically, with daily new confirmed cases soaring back to the 1,800 range after three days. Since the Level 4 social distancing measures are unlikely to be eased soon, the impact on self-employed businesses will persist, making it burdensome to raise interest rates.

The slowing economic recovery in the United States and China also adds pressure against raising rates in South Korea. Since exports constitute a large portion of the Korean economy, a slowdown in the recovery of the two major economies (G2) inevitably negatively affects Korean exports. The U.S. Department of Commerce announced that retail sales in July decreased by 1.1% compared to the previous month, a larger decline than the 0.3% decrease expected by the Wall Street Journal (WSJ). According to China's National Bureau of Statistics, the July Manufacturing Purchasing Managers' Index (PMI), reflecting China's economic conditions, fell 0.5 points from the previous month to 50.4, the lowest since February last year when COVID-19 shocks began. The Services PMI also recorded a five-month low at 53.3.

Meanwhile, emerging countries have already raised benchmark interest rates based on inflation and economic recovery trends, but the timetable for normalizing monetary policy may change depending on the spread of the Delta variant.

The Central Bank of Brazil raised its benchmark interest rate by 1.00 percentage point from the current annual rate of 4.25% to 5.25% on the 4th. This is the fourth consecutive increase following 0.75% hikes in March, May, and June, with the increment also increasing by 0.25 percentage points. The Central Bank of Russia has raised its benchmark rate three times this year by a total of 1.00 percentage point, currently standing at around 5.50% annually. The Central Bank of Turkey is also raising rates, and countries such as Mexico, the Czech Republic, and Hungary are showing tightening movements.

Experts say that how countries implement monetary and fiscal policies amid the spread of the Delta variant is a major challenge for central banks. The 'rich get richer, poor get poorer' phenomenon is accelerating during the COVID-19 recovery process, making it difficult to determine how to conduct interest rate policies that affect all sectors.

At the upcoming Jackson Hole meeting in the United States from the 26th to 28th, there is an expectation that the focus will be on how to mitigate the side effects of ultra-low interest rates amid the spread of COVID-19. The theme of the Jackson Hole meeting is 'Macroeconomic Policy in an Unequal Economy.' A senior Bank of Korea official stated, "As COVID-19 continues, vulnerable groups such as the self-employed continue to suffer, but there is also the problem of asset prices soaring due to loans taken out under ultra-low interest rates," adding, "At the Jackson Hole meeting, the focus will be on what macroeconomic policies are appropriate in an uneven recovery situation."

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