When Will the First Interest Rate Hike Occur Next Year?..."Consecutive Hikes Possible as Early as January"

Experts "Could rise to 1.25~1.75%"
Loan interest rates likely to increase further
Global liquidity withdrawal begins in Iceland, New Zealand, Brazil, and more

[Asia Economy Reporter Jang Sehee] Lee Ju-yeol, Governor of the Bank of Korea, strongly hinted at an additional base interest rate hike in the first quarter (January to March) of next year. However, the market expects that it will be realistically difficult to raise rates just before the presidential election (March 9). Accordingly, there is a forecast that the base interest rate will be raised by 0.25 percentage points in January next year.

Base Interest Rate at 1% Still Accommodative... Strong Indication of Additional Hike

Governor Lee said at a press conference held immediately after the Monetary Policy Committee (MPC) meeting on the 25th, "Although the base interest rate has reached 1%, it is still at an accommodative level," adding, "It depends on the economic situation, but I do not think it is necessary to rule out the possibility of a rate hike in the first quarter."

Since the base interest rate at 1% is still considered accommodative, the dominant analysis is that the Bank of Korea will raise the base interest rate further in January next year. The MPC meetings are scheduled for January 14 and February 24 early next year. However, there are opinions that an additional rate hike just before the presidential election will be difficult.

In the years when presidential elections were held, 2007 and 2012, the rates were frozen at 5.0% and 2.75% respectively, citing reasons such as weakening economic recovery. In the MPC meeting just before the 2017 presidential election, the base interest rate was unanimously kept at 1.25%.

Professor Lee In-ho of Seoul National University’s Department of Economics said, "If rates are raised, the economy could shrink, so the political circles will be reluctant to raise rates," adding, "The closer the election gets, the more likely the MPC will feel the burden."

Experts: Interest Rate Could Rise to 1.25~1.75%

Experts also expect the base interest rate to be raised once or twice more in the first quarter of next year.

Professor Kim Sang-bong of Hansung University’s Department of Economics said, "Considering the current growth trend and inflation, the base interest rate could rise to between 1.25% and 1.75%."

The Korea Capital Market Institute previously stated in its ‘2022 Economic and Capital Market Outlook’ report that the Bank of Korea might raise rates up to three times depending on the economic situation. The 10-year government bond yield is forecasted to range from a minimum of 2.2% to a maximum of 2.6%.

As Growth Recovers and Inflation Rises... Global Liquidity Withdrawal Begins

Considering domestic and international conditions, an additional base interest rate hike is inevitable. Domestically, growth remains solid while inflation is rising sharply. Additionally, the U.S. Federal Reserve’s tapering and the normalization of monetary policies in various countries support further hikes.

As economic recovery comes into view and inflation continues to rise, countries worldwide, including South Korea, are moving to withdraw liquidity. This year alone, advanced countries have raised rates multiple times: Iceland 4 times, New Zealand 2 times, Norway once. Emerging countries such as Brazil, Russia, and Hungary have raised rates 6 times; Czech Republic, Peru, and Mexico 4 times; Chile 3 times, among others.

A Bank of Korea official evaluated, "Most countries are reducing monetary easing policies due to strengthening economic recovery and increasing inflationary pressures." Recently, Jerome Powell, reappointed as the next Fed Chair, expressed his determination to fully address inflation, strengthening market expectations for an early rate hike.

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

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