Interest Rate Hike Imminent Next Week... Three Signals Sent by the Bank of Korea

November News Sentiment Index Rebounds After Three Months
Boosted by Export and Corporate Earnings
'Economic Recovery, High Inflation, Rapid Household Debt Increase'... Three Factors for Rise

[Asia Economy Reporter Jang Sehee] As the economic recovery trend continues faster than expected, there is growing consensus that the Bank of Korea's Monetary Policy Committee will raise the base interest rate on the 25th. Opinions also suggest that high inflation and accumulated financial imbalance risks are sufficient grounds for an interest rate hike.

According to the Bank of Korea on the 17th, the average news sentiment index for this month (as of the 15th) recorded 128.76, rebounding after three months. This is an increase of 8.3 points compared to the October average (120.46). A value above the baseline of 100 indicates that the perceived sentiment of households and businesses is improving.

Looking at the recent monthly news sentiment index, it recorded 129.82 in July, then declined to 126.47 and 120.99 in August and September, respectively. After three consecutive months of decline, it has risen again.

This level is even higher than November (116.79) and December (113.14) of 2019, which were unaffected by COVID-19. This indicates strong expectations for economic recovery. The main keywords this month were October exports, major corporate earnings from Samsung Electronics, SK, financial holding companies, with-Corona (gradual return to normal life), expectations for GDP rebound in Q4, and global inflation.

The improved economic sentiment is backed by exports and corporate earnings. A Bank of Korea official explained, "October export performance continued its strong trend, achieving the highest October export record ever, and the earnings results of major companies announced from late September to early October acted as positive factors."

In fact, exports in October increased by 24.1% compared to the same period last year, reaching $55.6 billion, the highest ever for October exports. Samsung Electronics posted nearly 74 trillion KRW in sales in Q3 this year, achieving the highest quarterly performance ever. The top 500 domestic companies are expected to challenge record-high operating profits, having recorded 167.7352 trillion KRW in operating profit through Q3 this year.

Lee Ju-yeol: "If the economy proceeds as we expect, additional rate hikes possible"... Inflation and household debt surge also play a role

As Bank of Korea Governor Lee Ju-yeol has stated his intention to normalize the base interest rate in line with the improving economic trend, the existing forecast that the Monetary Policy Committee will raise the base rate next week is gaining strength.

Governor Lee said last October, "We will gradually adjust the degree of monetary easing according to the extent of economic improvement," adding, "If the economic trend proceeds as we expect, we may consider additional base rate hikes." This follows the August increase of the base rate to 0.75%. He had also expressed intentions to adjust easing measures in July and August according to the economic recovery trend.

Soaring inflation is also a basis for raising interest rates. Due to rising oil prices and the base effect from last year's telecommunications fee support, consumer prices rose 3.2% last month compared to the same month last year, marking the largest increase in 9 years and 9 months. Last month's inflation was driven by petroleum products, but demand-side upward pressure is expected to grow, increasing inflation concerns. Professor Kim Sang-bong of Hansung University's Department of Economics stated, "From March next year, as the base effect disappears, the inflation rise may expand further."

Household debt, which is the highest relative to GDP, is also a factor to consider. According to a report by the Institute of International Finance, a survey of household debt to GDP ratios in 37 countries in Q2 this year showed South Korea at 104.2%, the highest. Following South Korea were Hong Kong at 92.0%, the UK at 89.4%, and the US at 79.2%. South Korea was the only country among those surveyed where household debt exceeded GDP.

Regarding this, Professor Ha Joon-kyung of Hanyang University's Department of Economics emphasized, "If expected inflation rises too much amid ongoing economic recovery, additional rate hikes may be possible early next year following this month." He added, "The upper limit of future interest rates will also be influenced depending on the degree of inflation."

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