Q4 'Economic Improvement and High Inflation' Continue... Interest Rates Likely to Rise Consecutively in January Next Year

Bank of Korea to Hold Monetary Policy Meeting on 25th
Dominant Expectation of 1.00% Rate Hike
Producer Prices Rose 8.9% Last Month
Largest Increase in 13 Years

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] As the economic improvement trend continues in the fourth quarter along with persistent high inflation, there are expectations that the Bank of Korea’s Monetary Policy Committee (MPC) will raise interest rates again in January next year following this month’s hike. The dominant view is that the Bank of Korea will hold an MPC meeting on the 25th and raise the base interest rate from 0.75% to 1.00% per annum, and considering the current economic conditions, it is highly likely that the base rate will be increased again at the MPC meeting scheduled for January next year.

The biggest reason for consecutive interest rate hikes is the strong inflation. Last month, the producer price index rose by 8.9% compared to the same month last year, marking the largest increase in 13 years since October 2008 (10.8%). Indicators such as exports and corporate earnings are also fueling inflation. On the 22nd, Professor Andonghyun of Seoul National University’s Department of Economics stated, "Due to the effects of fiscal spending, the growth rate in the fourth quarter is expected to be higher than the previous quarter," adding, "Since the deferred effect of producer prices can last up to six months, inflation is likely to continue its high trajectory for the time being."

Exports from November 1 to 20, as announced by the Korea Customs Service on the same day, increased by 27.6% compared to the same period last year, and the cumulative sales, operating profits, and net profits of KOSPI-listed companies up to the third quarter of this year all recorded all-time highs. The number of employed persons in October also increased by 652,000 compared to a year ago, continuing the upward trend for eight consecutive months.

The Bank of Korea and the government are optimistic about 4% growth for the Korean economy this year. This is because the combined effects of year-end consumption and fiscal spending are expected to result in a higher growth rate in the fourth quarter compared to other quarters. Excluding last year when COVID-19 resurged, the fourth-quarter growth rates in 2018 and 2019 were 0.8% and 1.3% quarter-on-quarter, respectively, showing higher growth than the previous quarters.

Next year, the MPC will meet not only in January but also in February. However, considering that the MPC did not raise interest rates before the last three presidential elections, there is a forecast that a rate hike in February will be a heavy burden. In the presidential election years of 2007 and 2012, the rates were held steady at 5.0% and 2.75% per annum respectively, citing reasons such as weakening economic recovery, and the MPC meeting just before the 2017 presidential election unanimously decided to keep the base rate at 1.25% per annum. Professor Kim Taegi of Dankook University’s Department of Economics said, "Since there is a belief that the ruling party should stimulate the economy, neither party would want to raise interest rates right before the election," adding, "The closer the election gets, the lower the possibility of a rate hike."

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