[Interest Rate Hike] Interest Rate Returns to Pre-COVID Level, Bank of Korea Raises to 1.25% Annual Rate

The Bank of Korea Raises Rate by 0.25%P, Consecutive Increase for First Time in 14 Years
Annual Interest Burden per Person Up 484,000 Won Since Last Year
Lee Ju-yeol: "Appropriate Adjustment of Monetary Policy Easing"

[Asia Economy Reporter Jang Sehee] The Bank of Korea raised the base interest rate to 1.25% per annum, returning to the pre-COVID-19 level after 22 months. The Bank of Korea held a Monetary Policy Board meeting two months after November last year and implemented the rate hike; this consecutive increase is the first in 14 years since the 2008 financial crisis.

On the 14th, the Monetary Policy Board of the Bank of Korea held a meeting on monetary policy direction at the Seoul headquarters, chaired by Governor Lee Ju-yeol, and announced a 0.25 percentage point increase in the base rate from 1.00% to 1.25% per annum.

This rate hike is interpreted as a measure to address financial imbalances caused by strong inflation and continued capital inflows into the asset market. The anticipated interest rate hike by the U.S. Federal Reserve (Fed) in March also contributed to the decision.

In the monetary policy direction statement, the Monetary Policy Board explained the background for the hike, stating, "With the resumption of private consumption recovery, a favorable growth trend continues, and the consumer price inflation rate is expected to remain in the 3% range for a considerable period."

The increase in the base rate has further increased the burden on borrowers. The Bank of Korea estimated that during the normalization of the base rate (from 0.50% to 1.25%) since last year, the annual interest burden on households will increase by 9.6 trillion won. The per capita interest burden is expected to rise from 2,896,000 won to 3,380,000 won annually, an increase of 484,000 won.

Governor Lee also hinted at the possibility of further rate hikes. At a briefing on the same day, he said, "Although uncertainties related to COVID-19 remain, the domestic economy is maintaining a favorable growth trend, and inflation is expected to exceed the target level for a considerable period; therefore, we will appropriately adjust the degree of monetary policy easing going forward."

However, considering factors such as the COVID-19 situation, changes in growth and inflation trends, and major countries' monetary policy changes, it is expected that future hikes will be decided according to economic conditions. The market anticipates that the Fed will raise its base rate more than four times this year.

Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "Considering the overall situation of inflation and household debt, it seems there was a judgment that the rate needed to be raised," adding, "As the Fed’s rate hikes become more active, Korea will inevitably follow the upward trend," evaluating that additional hikes are unavoidable.

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