[Weekly Review] Bank of Korea Ends Ultra-Low Interest Rate Era... First Time Births in 2020 Fall to 200,000s

Bank of Korea Raises Base Interest Rate from 0.5% to 0.75%
2020 Births Hit Historic Low of 200,000s... 'Population Cliff' Shows No Sign of Bottoming Out

[Asia Economy Reporter Kim Eun-byeol] 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 comes 15 months after applying the historically lowest base rate of 0.50% per annum in response to the COVID-19 pandemic. The Bank of Korea also raised its inflation forecast for this year from the previous 1.8% to 2.1%, an increase of 0.3 percentage points. With consumer price inflation exceeding the Bank of Korea’s target of 2% for four consecutive months, it acknowledged that the inflationary trend is stronger than expected. The Bank of Korea also raised its consumer price inflation forecast for next year from 1.4% to 1.5%.

Bank of Korea Raises Base Rate from 0.5% to 0.75%...Transforms into 'House Price Fighter'

The Monetary Policy Board of the Bank of Korea held a monetary policy direction meeting on the 26th at the Bank’s headquarters in Jung-gu, Seoul, chaired by Governor Lee Ju-yeol, and announced that it raised the base interest rate from 0.50% to 0.75% per annum. This is the first rate hike in 33 months since November 2018. Although uncertainties related to COVID-19 remain, the decision reflects the judgment that the surge in household loans and rising house prices and inflation can no longer be ignored. Despite stringent loan regulations by financial authorities, debt has continued to increase, so now the Bank of Korea intends to respond with the 'interest rate hike' card.

Governor Lee said at a press conference immediately after the rate hike, "Private consumption has somewhat slowed due to the resurgence of COVID-19, but exports remain strong and facility investment has shown a steady trend." He added, "The domestic economy is expected to gradually continue its recovery, centered on private consumption, thanks to expanded vaccination and the execution of supplementary budgets." The Bank of Korea maintained its growth forecast for this year at 4.0%, the same as in May, and projected 3.0% growth for next year. Governor Lee stated, "Although uncertainties related to COVID-19 continue, the domestic economy is expected to sustain a favorable growth trend, and inflation is expected to remain above 2% for some time." He added, "We will gradually adjust the degree of monetary policy easing going forward." Regarding the timing of further rate hikes, he said, "We will carefully review the development of COVID-19, changes in growth and inflation, accumulated risks of financial imbalances, and changes in major countries’ monetary policies before making a decision."

Among the 38 member countries of the Organisation for Economic Co-operation and Development (OECD), Korea was the seventh country to raise interest rates this year. Countries that raised rates earlier this year than Korea include Mexico, Iceland, the Czech Republic, Chile, Turkey, and Hungary, most of which are emerging economies with high inflation concerns. Among Asian countries, Korea was the first to raise rates since the outbreak of COVID-19. Among advanced economies, New Zealand hinted at a possible rate hike by the end of this year, and Norway indicated a rate hike in September.

[Image source=Yonhap News]

Korea’s Potential Growth Rate Falls to 2.0%...First Time Births Drop to 200,000 Range in 2020

Meanwhile, the Bank of Korea also stated that the COVID-19 pandemic has acted as a factor lowering the potential growth rate.

Governor Lee explained, "The potential growth rate of our economy for this year and next year is estimated to have fallen to around 2%. The main factors lowering the potential growth rate are the continuous demographic changes with a declining working-age population, worsened employment conditions due to the COVID-19 shock, and decreased productivity in the service sector."

In August 2019, the Bank of Korea estimated Korea’s average potential growth rate for 2019?2020 at 2.5?2.6%, but the newly estimated figures this month show an average of 2.2% for 2019?2020 and about 2.0% for 2021?2022.

Last year, the number of births in Korea dropped to the 200,000 range for the first time. The total fertility rate, which indicates the average number of children a woman is expected to have in her lifetime, recorded the lowest among the 37 OECD member countries at 0.84. Due to fewer marriages amid COVID-19, the birth rate is expected to continue declining for the time being.

According to the finalized '2020 Birth Statistics' released by Statistics Korea on the 25th, the number of births last year was 272,300, down 30,300 (-10%) from the previous year. The number of births, which reached 559,900 in 2001, has halved in 19 years. The total fertility rate last year (0.84) decreased by 0.08 from the previous year. Korea has recorded a fertility rate below 1.0 for three consecutive years since 2018 (0.98), and among OECD member countries, Korea is the only country with a total fertility rate in the zero range.

This declining birth rate trend continues this year as well. According to the 'June Population Trends' also released by Statistics Korea on the same day, the number of births nationwide from January to June was provisionally estimated at 136,917, down 3.5% from the same period last year. This is the lowest first-half figure since statistics began in 1981. Due to an increase in births among women in their late 30s, the estimated fertility rate for the first half of this year is 0.85.

[Image source=Yonhap News]

Hong Nam-ki: "Additional 62,000+ Units Secured for Pre-Sale Housing"

The government announced plans to secure a significantly larger number of pre-sale housing units than the current 62,000 units (2021?2022). Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki explained this expansion plan for pre-sale housing at a real estate market inspection meeting with related ministers held at the government Seoul office on the 25th.

Regarding the expansion of pre-sale housing, Deputy Prime Minister Hong said, "We will consult with local governments and project operators regarding private sale portions of public land such as the 3rd New Town and candidate sites for the 2.4 Plan urban development projects." He added, "We will also establish institutional foundations such as providing incentives to participating private construction companies."

The government has been considering expanding pre-sale housing after strong demand from actual buyers for pre-sale housing on newly developed sites such as the 3rd New Town.

Until now, pre-sale housing was conducted only for public sales managed by public enterprises such as the Korea Land and Housing Corporation (LH), but the plan is to apply it to private housing on public land, public redevelopment, and urban public housing complex projects under the 2.4 Plan urban development projects as well.

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