[Base Interest Rate 1% Era] The '1% Interest Rate Era' Returns After 1 Year and 8 Months

BoK Raises Base Interest Rate by 0.25%P Again
Responding to Surge in Household Loans and Inflation
Debt-Driven Borrowers Face Inevitable Loan Interest Burden

[Asia Economy Reporter Jang Sehee] The Bank of Korea's benchmark interest rate, which had dropped to the 0% range during the COVID-19 crisis response, has returned to the 1% range for the first time in 1 year and 8 months. The era of zero interest rates has ended, and the period of full-scale interest rate hikes has arrived. The repayment pressure and interest burden on borrowers, including those who increased loans during the ultra-low interest rate period such as the ‘Yeongkkeul’ and ‘Bittu’ groups, are expected to grow even heavier.

The Monetary Policy Board of the Bank of Korea held a monetary policy direction decision meeting on the 25th at the main building in Jung-gu, Seoul, chaired by Governor Lee Ju-yeol, and announced that the benchmark interest rate was raised from 0.75% per annum to 1.00%. This marks another rate hike in three months amid high household debt levels and soaring inflation. 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 rate hike is a measure to respond to the surge in household loans and rising inflation amid ongoing economic recovery. At the press conference that day, Governor Lee evaluated, "The domestic economy is showing favorable trends in exports and investment, and private consumption recovery is expected to strengthen." Since the economy is recovering, the decision was made to normalize the ultra-low interest rates and curb soaring inflation.

The Bank of Korea raised its inflation forecast for this year from 2.1% to 2.3%. The inflation forecast for next year was also raised from the previous 1.5% to 2.0%. On the other hand, the economic growth forecasts for this year and next year remain unchanged at 4.0% and 3.0%, respectively, as announced in August.

Governor Lee also hinted at the possibility of further interest rate hikes. He stated, "Since inflation is expected to exceed the target level for a considerable period, we will appropriately adjust the degree of monetary policy easing going forward." The Bank of Korea will make judgments considering the COVID-19 developments, changes in growth and inflation trends, and monetary policy changes in major countries. The market is placing more weight on a rate hike in January rather than February next year.

With the benchmark interest rate returning to the 1% range, the burden on borrowers is expected to increase further. The Bank of Korea analyzed that a 0.25 percentage point increase in the benchmark rate would raise the additional interest burden by 2.9 trillion won.

Professor Lee In-ho of Seoul National University’s Department of Economics emphasized, "It appears that the rate hike was made considering the rapid increase in household debt and rising inflation. The repayment burden on borrowers, including the Yeongkkeul and Bittu groups, will increase further, and companies may also face difficulties as borrowing costs rise."

Professor Kim Jin-il of Korea University’s Department of Economics evaluated, "If our economy continues to grow and the Bank of Korea maintains the inflation target of 2%, the 1.00% annual interest rate level should still be considered accommodative."

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