Tightening the Money Supply Amid Household Debt and High Inflation... Bank of Korea Raises Base Rate to 1.00% (Comprehensive)

3rd Quarter Household Credit 1845 Trillion... Continued Increase in Mortgage Loans
Inflation in 2% Range for 7 Months
Experts Say "Annual 1.00% Still Accommodative"

[Asia Economy Reporter Jang Sehee] The Bank of Korea raised the base interest rate to 1.00% per annum on the 25th to resolve financial imbalances and stabilize prices. This marks the end of the 'ultra-low interest rate era' that lasted for 20 months.

The Monetary Policy Board of the Bank of Korea held a meeting on the 25th at the Bank of Korea 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% to 1.00% per annum.

This is another rate hike after 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.

Responding with the 'Interest Rate Card' to Household Debt and High Inflation

Given that household debt remains at a high level and inflation continues to soar, the Bank of Korea judged that it must respond with interest rate measures.

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's 17.3 trillion won. The year-on-year growth rate also recorded 8.8%, higher than the 8.5% in the first quarter and 8.6% in the second quarter.

If the current low interest rate environment continues, risk-taking behavior due to excessive borrowing could also intensify. Governor Lee Ju-yeol mentioned the risks of household debt in August, stating, "Resolving financial imbalances is an urgent task, and macroprudential policies must be accompanied by monetary policy responses."

Soaring inflation is 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%). Since April, when the consumer price index exceeded the 2% threshold at 2.3%, it has continued to stay above 2% for seven consecutive months until last month. The producer price index in October also rose for 12 consecutive months since November last year, showing the longest upward trend in 10 years.

Economic Improvement Trend Continues... Experts Say "1.00% Per Annum Still Accommodative"

The ongoing economic improvement also contributed to the rate hike. Exports remain strong, and with the implementation of With Corona (gradual return to normal life), domestic consumption is expected to revive. Retail sales in September rose 2.5% compared to the previous month, marking 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.

Professor Lee In-ho of Seoul National University’s Department of Economics said, "Considering the surge in household debt and rising inflation, it appears that the base interest rate was raised. The 1.00% level should still be seen as an accommodative stance."

Professor Kim Sang-bong of Hansung University’s Department of Economics added, "With heating demand increasing in winter, inflation is likely to rise further. Since inflation affects production, investment, and consumption, raising the base interest rate is appropriate under the current circumstances."

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