7 Days to the Monetary Policy Meeting... Will the Bank of Korea Raise Interest Rates Despite the COVID-19 Resurgence?

New Zealand Finally Holds Off Interest Rate Hike Due to COVID-19

[Asia Economy Reporter Eunbyeol Kim] The Bank of Korea's base interest rate decision is just one week away. Attention is focused on whether the Bank of Korea will tighten monetary policy by raising the base rate first among Asian countries. Since the Bank of Korea has hinted several times since June about the possibility of a rate hike within the year and the economic situation is not unfavorable, the likelihood of a rate hike in August is gaining weight. There are sufficient grounds for a rate increase, including soaring housing prices and inflation based on household debt amounting to 1,765 trillion won, and the recent trend of foreigners avoiding risky assets, which calls for enhancing the attractiveness of interest rates. However, the unpredictable COVID-19 Delta variant complicates the Bank of Korea's decision. The resurgence of COVID-19 has also altered the rate hike schedule of New Zealand, where a rate increase this month was considered 100% certain.

According to financial market insiders on the 19th, the market expects the Bank of Korea to hold a Monetary Policy Committee meeting on the 26th and raise the base rate from the current 0.50% per annum to 0.75%, a 25 basis point (1bp=0.01 percentage point) increase. There are also forecasts that the Bank of Korea will raise rates twice by the first half of next year. Previously, global investment bank JP Morgan predicted that the Bank of Korea would raise rates twice within the year. Initially, JP Morgan expected the rate hike in October, but after reviewing the remarks of Monetary Policy Committee members in the Bank of Korea's meeting minutes, they saw a greater possibility that the timing of the rate hike would be brought forward. The government and the Bank of Korea have shifted into 'housing price fighters' in the second half of the year, adding weight to the possibility of a rate hike. Go Seung-beom, a newly appointed Monetary Policy Committee member of the Bank of Korea and nominee for the Financial Services Commission chairman, expressed a minority opinion in favor of a rate hike last month.

The problem remains COVID-19. The global spread of the Delta variant is severe, and the daily number of confirmed COVID-19 cases in Korea has again exceeded 2,000. With the extension of social distancing level 4 inevitable, there are concerns that a rate hike could be a burden. The slowing economic recovery of the two major countries (G2), the United States and China, is also a factor weighing against a rate hike. The economic slowdown in the G2 could lead to a decline in Korean exports.

COVID-19 also caused New Zealand, which was expected to raise its base rate earlier than Korea, to postpone its rate hike. On the 18th (local time), the Reserve Bank of New Zealand (RBNZ) broke expectations of raising the base rate from 0.25% to 0.50% and kept rates unchanged. New Zealand's consumer price inflation rate in the second quarter reached 3.3%, and it ranked first in Bloomberg's 'housing bubble ranking,' showing a pattern similar to Korea.

The U.S. Federal Reserve (Fed) has presented a tightening schedule to begin tapering (reducing asset purchases) within the year but is expected to approach rate hikes cautiously. This is because the U.S. still bears trauma from the sudden tightening measures after the global financial crisis, which showed signs of economic recession. The Wall Street Journal (WSJ) judged that a tapering decision is likely at the Federal Open Market Committee (FOMC) meeting in November. In June, Fed officials indicated in the dot plot that two rate hikes are expected in 2023. The plan is to complete tapering by the first half of next year and, after confirming macroeconomic and employment recovery about a year later, to possibly raise rates twice.

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