The Bank of Korea Holds Base Rate at 0.75%... Green Light for Possible November Hike (Comprehensive)

Global Risks Rise with US Tapering and Evergrande Crisis
Monetary Policy Committee Takes a Breather
Experts Say "House Prices and Inflation Excessive... Partial Liquidity Withdrawal Needed"
Rate Hike Inevitable at November MPC Meeting

[Asia Economy Reporter Jang Sehee] The Bank of Korea's Monetary Policy Committee decided on the 12th to keep the base interest rate unchanged at the current 0.75%. This is due to the real economy indicators declining amid the impact of the fourth wave of COVID-19 and increased uncertainty in financial markets caused by global risks.

On the day, the Bank of Korea held a Monetary Policy Committee meeting chaired by Governor Lee Ju-yeol and announced that the base interest rate would be maintained at 0.75% per annum. The Monetary Policy Committee had raised the base rate to 0.75% in August and had signaled further hikes within the year. However, considering that consecutive rate hikes could strain economic recovery, this month’s decision is seen as a pause.

Surveys by the Korea Financial Investment Association also showed a high consensus for a rate freeze. At the end of last month, the association surveyed 200 domestic bond market participants about the direction of the base rate, with 87% of respondents expecting the rate to remain unchanged. They cited uncertain external conditions such as the US debt ceiling negotiations and the Evergrande crisis, as well as a wait-and-see stance on the policy effects following the August rate hike.

The Bank of Korea’s decision to hold rates reflects ongoing real economy shocks from the fourth wave of COVID-19 and increased volatility in financial markets.

According to the 'August Industrial Activity Trends' released by Statistics Korea on the 30th of last month, industrial production, retail sales, and facility investment all declined in August. This simultaneous decrease across the three sectors is the first in three months since May. Industrial production fell by 0.2% month-on-month, retail sales?which indicate consumer trends?dropped by 0.8%, and facility investment decreased by 5.1%. The Korea Development Institute (KDI) also noted that "amid a slowdown in recovery due to sluggish face-to-face services, global economic uncertainties have expanded, increasing downside risks to our economy."

The decision to freeze rates was also influenced by increased financial volatility due to global issues. Indeed, global negative factors such as China’s Evergrande crisis, US debt ceiling negotiations, and inflation concerns have been occurring continuously.

As a result, the KOSPI index fell below the 3,000 mark for the first time in six months. On the same day, the won-dollar exchange rate opened at 1,196.0 won, up 1.4 won from the previous day in the Seoul foreign exchange market. The won-dollar rate closed at 1,194.6 won on the 8th, marking the highest closing level in one year and two months due to the strong dollar.

Meanwhile, the possibility of a rate hike at the Monetary Policy Committee meeting scheduled for the 25th of next month?the last meeting of the year?has increased. This is to prevent the worsening side effects of low interest rates, such as rapid household debt growth, rising inflation, and increasing real estate prices.

Regarding this, Professor Andonghyun of Seoul National University’s Department of Economics said, "After transitioning to the With-Corona phase, confirming improvements in economic indicators, the process of confidently raising rates is expected." He added, "At next month’s Monetary Policy Committee meeting, rates are likely to be raised to curb the increase in household loans and real estate prices."

Professor Sung Tae-yoon of Yonsei University’s Department of Economics stated, "Even considering inflation factors alone, the situation calls for a rate hike," adding, "Inflation, which was limited to food prices earlier this year, is now spreading broadly." He further emphasized, "Liquidity should be partially withdrawn to curb inflation."

Professor Kim Sang-bong of Hansung University’s Department of Economics also pointed out, "Considering the rapid increase in household debt and inflation trends, rates should be raised at next month’s Monetary Policy Committee meeting," warning, "If the current low interest rate environment continues, there could be a situation where bonds do not sell."

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