[Interest Rate Hike] Bank of Korea Raises Base Rate to 0.75% to Curb Household Debt and Housing Prices (Comprehensive Report 2)

Surge in Household Loans and Real Estate Prices Addressed with 'Interest Rate Card'
Experts Say "Forward Guidance Effect Unlikely to Cause Major Market Shock"

[Asia Economy Reporters Jang Sehee and Kim Eunbyul] The Bank of Korea has put an end to the ultra-low interest rate era by raising the base interest rate to 0.75% per annum. This interest rate hike is the first in 2 years and 9 months since November 2018, and the first increase in 15 months since the rate was held steady at 0.50%. Additionally, it forecasted this year's economic growth rate at 4.0% and next year's growth rate at 3.0%.

On the 26th, the Bank of Korea held a Monetary Policy Board meeting chaired by Governor Lee Ju-yeol at the Bank's headquarters in Seoul and announced that the base interest rate was raised from 0.50% to 0.75%.

Although the fourth wave of COVID-19 is still ongoing and the Delta variant is spreading worldwide, maintaining uncertainty, the Bank of Korea appears to have judged that the rapid surge in household debt due to abnormally low interest rates poses a greater risk. The Bank intends to address the side effects of the surge in household loans and rising real estate prices caused by ultra-low interest rates with the 'interest rate hike' measure.

The Bank raised rates because it could no longer overlook the financial imbalance caused by excessive growth in household loans and the concentration of funds in real estate. Household debt reached 1,806 trillion won in the second quarter. The scale of household debt, which was around 1,600 trillion won in 2019, increased sharply to 1,727 trillion won in 2020, 1,765 trillion won in the first quarter of this year, and 1,806 trillion won in the second quarter.

Despite efforts by financial authorities and banks to manage household loans, the upward trend has not slowed, prompting the Bank of Korea to respond with an interest rate hike.

The rise in housing prices closely linked to household loans was also taken into consideration. Governor Lee previously analyzed at a Monetary Policy Board meeting last month that the rise in real estate prices is closely related to the increase in debt, stating, "Housing prices are judged to be considerably overvalued."

According to the weekly apartment price trend for the third week of August (as of the 16th) released by the Korea Real Estate Board, the sales price in the Seoul metropolitan area rose by 0.40% in one week, the highest weekly increase since statistics began in May 2012. According to the Korea Real Estate Board's nationwide housing price trend survey, the average sales price of apartments in Seoul in July was 1.1093 billion won, rising by 181.17 million won from the previous month and surpassing 1.1 billion won for the first time.

Despite the ongoing COVID-19 situation, the economic recovery trend has been somewhat confirmed, and the inflation forecast has exceeded 2.0%, supporting the interest rate hike. The Bank of Korea maintained its annual growth forecast at 4.0% for this year and projected a 3.0% growth rate for next year. The inflation forecast was revised upward from 1.8% to 2.1%. Additionally, ongoing vaccination efforts and expectations for the government's supplementary budget effects were also reasons for raising the interest rate.

In this regard, Professor Andonghyun of Seoul National University's Department of Economics stated, "This interest rate decision appears to focus on financial imbalances such as the increase in household loans and asset price bubbles," adding, "It is more effective to respond to household loan issues through monetary policy rather than regulation."

The financial market shock from this interest rate hike is expected to be limited. Since May, the Bank of Korea has indicated three times its intention to raise the base interest rate within the year, and last month, a minority opinion advocating for a rate hike was expressed for the first time at the Monetary Policy Board.

Professor An said, "Since the Bank of Korea gave forward guidance indicating a rate hike within this year, the market has already priced in some of it," adding, "There may be some volatility and a slight increase in interest rates."

Professor Kim Sangbong of Hansung University's Department of Economics also said, "The market has already anticipated the rate hike, and market interest rates have risen, so the market shock is expected to be less than anticipated."

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