The Bank of Korea Raises Base Interest Rate to 1.00% per Year... The Era of Zero Interest Rates Ends (Update)

Base Interest Rate Raised from 0.75% to 1.00%
Concerns Over Soaring Household Debt and High Inflation
Consumer Prices Rose 3.2% Compared to Last Year in the Previous Month

[Asia Economy Reporter Jang Sehee] The Bank of Korea raised the base interest rate to 1.00% on the 25th to resolve financial imbalances and stabilize prices. This marks a return to the 1% range after 20 months since the era of sub-1% base rates (1.25→0.75%) began in March last year.

The Monetary Policy Board of the Bank of Korea held a meeting on the 25th at the Bank's headquarters in Jung-gu, Seoul, chaired by Governor Lee Ju-yeol, and announced that the base interest rate was raised from the previous 0.75% per annum to 1.00%.

This is the second rate hike in three months to curb soaring prices amid persistently high household debt levels. It is the first time in 10 years since March 2014 (3%→3.25%) that the Bank of Korea has raised rates within three months.

The decision was driven by the judgment that the Bank of Korea must respond with interest rate measures as household debt remains at a high level and high inflation continues.

In fact, household credit balance in the third quarter reached 1,844.9 trillion won. In particular, mortgage loans increased by 20.8 trillion won, which is 3.5 trillion won more than the previous quarter (17.3 trillion won). The year-on-year growth rate was 8.8%, higher than the first quarter (8.5%) and second quarter (8.6%).

If the current low interest rate environment continues, risk-seeking behavior due to excessive borrowing may also intensify. Governor Lee Ju-yeol mentioned the risks of household debt in August, stating, "Resolving financial imbalances is an urgent task, and it is time for monetary policy responses to accompany macroprudential policies."

Soaring prices are also a problem. Last month, the consumer price index rose 3.2% compared to a year earlier, marking the highest increase in 9 years and 9 months since January 2012 (3.3%). Consumer prices have been above 2% for seven consecutive months since April, when it exceeded the 2% threshold at 2.3%. The producer price index in October also rose for 12 consecutive months since November last year, showing the longest period of increase in 10 years.

The continued economic improvement also contributed to the rate hike. Exports remain strong, and with the implementation of With Corona (gradual recovery of daily life), domestic consumption is expected to revive. Retail sales in September rose 2.5% compared to the previous month, the largest increase in six months since March (2.5%). Additionally, the effect of the supplementary budget executed in the third quarter is expected to be reflected in the fourth quarter with a time lag.

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