[Weekly Review] Bank of Korea Takes Historic First 'Big Step'... But Exchange Rate Hits Highest in Over 13 Years

Bank of Korea Governor Lee Chang-yong is answering questions from the press at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Sejong=Reporter Son Seon-hee] The Bank of Korea took a 'big step' by raising the base interest rate by 0.5 percentage points at once for the first time in history. This decision aims to curb the rapidly rising inflation. The government plans to provide financial support to reduce the burden on vulnerable groups caused by the interest rate hike.

The Monetary Policy Committee (MPC) of the Bank of Korea held a monetary policy meeting on the 13th and raised the current base rate from 1.75% per annum to 2.25%, an increase of 0.5 percentage points. This is the first time in about seven years since 2015 that the base rate has risen to the 2% range.

In the resolution on the monetary policy direction, the MPC assessed the domestic economy, stating, "Although the consumption recovery trend is expected to continue, exports are slowing due to the weakening growth of major countries, and this year’s growth rate is expected to fall slightly short of the May forecast (2.7%). The uncertainty of the growth path is also judged to be high."

Furthermore, it analyzed, "Consumer prices are expected to continue a high rise exceeding 6% for the time being, and this year’s inflation rate is also expected to significantly exceed the May forecast (4.5%)."

Concerns have been raised that the interest burden will sharply increase following the base rate hike, potentially causing great hardship for vulnerable groups. This is because financial debt has rapidly increased in a short period, especially among low-income groups and small business owners, due to the COVID-19 pandemic that has lasted for over two years.

Accordingly, the government plans to prepare support measures through financial assistance. President Yoon Seok-yeol held the 2nd Emergency Economic and Livelihood Meeting on the 14th and emphasized, "Although the interest rate hike is an inevitable measure to curb inflation, the burden should not be passed on to socially vulnerable groups. We will actively utilize financial resources to prepare countermeasures."

The government decided that the Korea Asset Management Corporation (KAMCO) will purchase loan claims from small business owners and self-employed individuals struggling with loan repayments, and will ease repayment burdens through maturity extensions and interest rate reductions. Additionally, for high-interest borrowers, low-interest refinancing loans will be supported through credit guarantees from the Korea Credit Guarantee Fund.

Exchange rate at 1,320 won level for the first time in about 13 years... Insufficient stabilization of the foreign exchange market despite the 'big step'

Despite the Bank of Korea’s 'big step,' the exchange rate continued its sharp rise. On the 15th, the won-dollar exchange rate closed at 1,326.1 won per dollar, up 14.0 won from the previous day’s closing price. The exchange rate exceeding 1,320 won during the trading session is the first time in about 13 years and 2 months since April 30, 2009 (high of 1,325.0 won).

Regarding this, Bang Ki-seon, the 1st Vice Minister of Strategy and Finance, said, "Considering the financial market situation that has become sensitive to major domestic and international issues recently, we will strengthen market monitoring. We will actively respond to excessive market concentration and, if necessary, review additional measures according to contingency plans for each market."

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