[Interest Rate Hike] Accelerated 'Interest Rate Normalization' Amid Soaring Prices... Bank of Korea Raises Base Rate to 1.25% (Comprehensive)

'Additional Interest Rate Hike' After 2 Months
Impact of Inflation Rise and Fed's Early Tightening
Experts: "Fed Rate Hikes Intensify... Korea's Increase Trend Inevitable"

[Asia Economy Reporter Jang Sehee] The Bank of Korea raised its benchmark interest rate to 1.25%. This is the first increase in two months since the hike last November and the first consecutive rate hike since 2008.

The Monetary Policy Board of the Bank of Korea held a meeting on the 14th at the Bank of Korea headquarters in Jung-gu, Seoul, chaired by Governor Lee Ju-yeol, and announced that the benchmark interest rate was raised from the previous 1.00% per annum to 1.25%. This is the first time in 10 years since January 2011 (2.50→2.75%) and March 2011 (2.75%→3.00%) that the Bank of Korea has raised rates twice within two months.

Bank of Korea aims to catch two rabbits: price stability and financial stability

This move is interpreted as a measure to respond to inflation and financial imbalances. Additionally, the expected interest rate hike by the U.S. Federal Reserve (Fed) in March also contributed to the decision.

Last year, consumer prices rose by 2.5%, marking the highest level in 10 years. From April, public utility fees such as electricity and gas are also scheduled to increase, so there is a judgment to reduce inflationary pressure in advance.

There is also a strong intention to further solidify the slowdown in household debt growth. Recently, household loan growth has somewhat slowed, and the rate hike aims to curb excessive borrowing.

In fact, household loans increased by 200 billion KRW in December compared to the previous month, significantly reducing the increase from the previous month (5.9 trillion KRW). While the monthly trend is slowing, household credit remains at a high level. In the third quarter of 2021, household credit was 1,844.9 trillion KRW, an increase of 36.7 trillion KRW from the previous quarter (1,808.2 trillion KRW). The year-on-year growth rate was 9.7%.

There is also an analysis that this was a preemptive response to prevent capital outflows. If the interest rate gap between Korea and the U.S. widens, capital outflows and upward pressure on the exchange rate may increase. The market expects the Fed to raise its benchmark interest rate more than four times this year.

Continued economic recovery and early Fed tightening also influence... interest rates likely to rise further

Along with this, the fact that the economy continues to recover despite COVID-19 also influenced the decision to raise the benchmark interest rate. Last year, annual exports reached 644.54 billion USD, up 25.8% from the previous year, and exports in the first 10 days of January this year increased by 24.4% compared to the same period last year. The number of employed persons also increased by 369,000 compared to a year ago, indicating a continued employment recovery.

Regarding this, Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "As the Fed’s rate hikes become more active, Korea has no choice but to follow the upward trend. Considering inflation and household debt comprehensively, it was judged necessary to raise rates."

Meanwhile, this additional rate hike was seen as an expected step. Governor Lee also stated in his 2022 New Year's address that "the degree of monetary policy easing will be appropriately adjusted according to the improvement of the economic situation." Earlier, the Bank of Korea conducted a 'big cut' in March last year, lowering the benchmark interest rate from 1.25% to 0.75%, and then lowered it further to a record low of 0.5% in May of the same year. After maintaining the rate for 15 months, it raised the rate by 0.25 percentage points in August and November.

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