Central Banks Worldwide Accelerate Tightening Clock... Bank of Korea's Rate Hike Imminent

Brazil, Russia Raise Benchmark Interest Rates... US, Australia Signal Tapering

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] As concerns over inflation grow, the tightening clocks of central banks worldwide are also accelerating. There is an analysis that raising the benchmark interest rate could actually have a positive effect on economic growth.

According to the Bank of Korea and major foreign media on the 13th, after Norway became the first Western developed country last month to raise its benchmark interest rate from 0% to 0.25% per annum, emerging countries such as Brazil, Russia, Hungary, and Chile began to raise rates one after another. The Central Bank of Brazil recently raised its benchmark interest rate by 1 percentage point from 5.25% to 6.25%. This is the fifth consecutive increase following the rise from 2.00% to 2.75% in March. The Central Bank of Russia also raised its benchmark interest rate by 0.25 percentage points to 6.75%, and the central banks of Hungary and Chile raised rates to 1.65% and 1.50%, respectively. Iceland (1.25%), the Czech Republic (0.75%), and Mexico (4.50%) have also joined the rate hike ranks.

In the UK, since Governor Andrew Bailey and member Michael Saunders recently warned of inflation risks, the prevailing view is that interest rates will be raised soon.

The United States, Australia, Canada, and New Zealand have expressed intentions to reduce asset purchases, signaling a withdrawal of loosened liquidity. The Fed is likely to announce a tightening roadmap and begin tapering (reducing asset purchases) at the Federal Open Market Committee (FOMC) regular meeting on June 2-3. The Reserve Bank of Australia already announced tapering in July by reducing weekly bond purchases from 5 billion AUD to 4 billion AUD, and in the same month, the Bank of Canada reduced weekly bond purchases from 3 billion CAD to 2 billion CAD. This is expected to be a step to gradually reduce quantitative easing to minimize market shocks and raise benchmark interest rates.

The Bank of Korea, which raised rates once in August, is also highly likely to raise rates again next month. Bank of Korea Governor Lee Ju-yeol recently stated, "If the economic flow proceeds as expected, I think we can consider an additional benchmark interest rate hike at the next meeting."

When interest rates rise, liquidity decreases, which helps curb household debt and inflation. According to the Bank of Korea, raising the benchmark interest rate by 0.25 percentage points slows the household debt growth rate and housing price increase rate by 0.4 percentage points and 0.25 percentage points respectively over the next year. Additionally, according to data submitted by the Bank of Korea to Jeong Seong-ho, a member of the National Assembly’s Planning and Finance Committee from the Democratic Party, raising the benchmark interest rate by 25 basis points reduces the probability of negative growth from 10.1% to 8.5%. This means that raising the benchmark interest rate also has the effect of defending against negative growth.

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