Bank of Korea Expected to Raise Interest Rates Earlier Than the US Early Next Year

Possibility of Rate Hike at This Month's Monetary Policy Meeting
Concerns Over Increased Debt Burden on Households and Companies

[Asia Economy Reporter Jang Sehee] As the U.S. Federal Reserve (Fed) shifts its monetary policy direction toward 'tightening,' the Bank of Korea is increasingly likely to raise its benchmark interest rate at the Monetary Policy Committee meeting scheduled for the 25th of this month. If the U.S. tapering (reduction of asset purchases) intensifies domestic pressure for interest rate hikes, the burden on households and companies that have increased their debt is also expected to grow.

◆ Normalization process for Korean interest rates = Although Jerome Powell, Chairman of the U.S. Federal Reserve, showed dovish tendencies (preference for monetary easing) and drew a line on the possibility of interest rate hikes, this is not expected to significantly affect the direction of Korea's interest rate decisions.

Professor Kim Jin-il of Korea University’s Department of Economics said on the 4th, "The Bank of Korea has stated that it does not necessarily have to follow the U.S. decision, and issues such as financial imbalances and rising inflation are serious," adding, "Considering the movement of foreign investor capital outflows, the factors for interest rate increases seem to be greater."

Professor Sung Tae-yoon of Yonsei University’s Department of Economics also evaluated, "Because the inflation rate is quite high, interest rate hikes to withdraw liquidity are inevitable," and "U.S. tapering is a factor weakening the Korean won, so the issue of foreign investor capital movement is also a concern."

Bank of Korea Governor Lee Ju-yeol stated in May, "While considering the Fed’s monetary policy, we do not operate monetary policy on a one-to-one matching basis," and added, "Since the Fed is maintaining an easing stance, if we adjust monetary policy according to domestic conditions, we have the advantage of controlling the pace according to our situation."

◆ Additional hikes possible early next year... Household burden increases = If U.S. tapering and interest rate hikes continue, the interest burden on households and companies is expected to increase. According to the Bank of Korea, if the benchmark interest rate rises by 0.5 percentage points, the interest for high-income earners (top 30% income bracket) increases from 3.81 million won to 4.24 million won, a rise of 430,000 won. For vulnerable groups (multiple debtors in the bottom 30% income bracket), interest rises from 3.2 million won to 3.73 million won, an increase of 530,000 won.

In particular, there is analysis that the Bank of Korea may raise rates again early next year following this month’s hike. The only time the Bank of Korea consecutively raised the benchmark interest rate was in July and August 2007. Professor Ha Jun-kyung of Hanyang University’s Department of Economics emphasized, "If the economic recovery continues and expected inflation rises too much, an additional hike early next year following this month is possible."

Governor Lee also stated that the degree of future monetary policy easing will be decided comprehensively by judging factors such as the easing of constraints on economic activities and the improvement trend in Korea’s economic growth.

Meanwhile, the Ministry of Economy and Finance recently announced that it will conduct an emergency buyback of about 2 trillion won focused on medium-term bonds (5?10 years) on the 5th to stabilize the government bond market, which has shown excessive volatility. Lee Ok-won, First Vice Minister of the Ministry of Economy and Finance, added, "If volatility expands again in the future, we plan to proactively implement market stabilization measures in advance through active policy coordination with the Bank of Korea." The Bank of Korea plans to strengthen monitoring of market conditions and, if necessary, implement market stabilization measures such as purchasing government bonds.

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