The End of the Ultra-Low Interest Rate Era, Additional Hikes Likely Within the Year

Experts "Additional Increase Expected in October or November"
Concerns Over Damage to Self-Employed and Marginal Companies

[Asia Economy Reporter Jang Sehee] As the Bank of Korea's Monetary Policy Committee raised the base interest rate, expectations are emerging that additional rate hikes are likely in the future. Some even predict that two more rate hikes will occur during Governor Lee Ju-yeol's term. The governor's term lasts until the end of March next year.

On the 26th, the Bank of Korea held a Monetary Policy Committee meeting and raised the base interest rate from 0.5% to 0.75% per annum. This decision was made based on the judgment that financial imbalances such as the increase in household loans and rising asset prices can no longer be ignored. In fact, as of the second quarter, total household credit reached a record high of 1,805.9 trillion won.

At a press briefing that day, Governor Lee stated, "We plan to adjust gradually in line with the degree of economic improvement," hinting at the possibility of additional rate hikes within the year. This is especially because if the current financial imbalances worsen, the resulting side effects could become more severe.

Moreover, the effect of monetary policy is greater when rates are raised twice consecutively rather than a single 0.25 basis point increase.

In this regard, Lee Sae-sun, a researcher at Hana Financial Investment, said, "The market has already priced in two consecutive rate hikes, so the Bank of Korea faces less burden in deciding on additional hikes," adding, "Whether raising or lowering rates, the effect is significant when done consecutively, so we expect a hike in October or November." She further noted, "If no additional hikes are made, the policy effect will be almost none, similar to not raising rates at all."

Kim Sang-bong, a professor of economics at Hansung University, stated, "The financial imbalance problem is worsening," and emphasized, "We need to raise rates to suppress demand." He also pointed out, "An additional rate hike should be made in October."

The economic recovery following vaccine rollouts is also cited as a supporting reason for further rate hikes.

Professor Ahn Dong-hyun of Seoul National University's Department of Economics said, "Exports are performing well, and domestic demand has not significantly declined due to revenge consumption," adding, "Considering the supplementary budget effect, this year's growth rate is expected to be around 4.0%."

If the base interest rate leads to an increase in market interest rates in the financial sector, there is a possibility of insolvency among vulnerable groups who borrowed from financial institutions, self-employed individuals, and marginal companies. According to Bank of Korea statistics, as of June, 81.5% of new household loans from deposit banks were at variable interest rates. If changes in the base rate are reflected in short- and long-term financial bond rates and bank loan rates rise accordingly, the burden could increase.

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