[Base Rate 3%] Bank of Korea Executes Second 'Big Step'... 3% Interest Rate Era in 10 Years (Update)

Bank of Korea Governor Lee Chang-yong is striking the gavel at the Monetary Policy Committee regular meeting held at the Bank of Korea in Jung-gu, Seoul on the 12th. Photo by Joint Press Corps

[Asia Economy Reporter Seo So-jeong] The Bank of Korea has implemented a ‘big step’ by raising the base interest rate by 0.50 percentage points at once for the first time in three months. This is the second big step and also the first-ever instance of five consecutive rate hikes. As a result, the Korean base interest rate has returned to the 3.00% range for the first time in 10 years. If the rate hike trend continues at the final Monetary Policy Committee meeting next month following this month, the year-end base interest rate could rise to as high as 3.5%.

The Bank of Korea’s Monetary Policy Committee held a meeting on the morning of the 12th and decided to raise the base interest rate from 2.5% to 3.00%. This year, the base rate was raised by 0.25 percentage points each in January and April, and by 0.50 percentage points in July, marking the first-ever big step. Following that, it was raised by 0.25 percentage points in August, and with today’s second big step, it has returned to the 3.00% level last seen in October 2012.

Amid growing concerns about a global economic recession, the Bank of Korea’s unprecedented move to raise rates five consecutive times is due to the more urgent need to ‘control inflation.’ The consumer price index for September (108.93) rose 5.6% compared to the same month last year. Although the rate of increase has fallen for two consecutive months following August (5.7%), it remains stubbornly above the mid-5% range.

Another major reason for the rate hike is the widening interest rate gap between Korea and the United States as the U.S. Federal Reserve (Fed) continues its high-intensity tightening. With today’s increase, the current base interest rate gap between Korea (3.00%) and the U.S. (3.00?3.25%) has narrowed to a maximum of 0.25 percentage points. The challenge lies ahead. If the Fed continues to raise rates by at least a big step until the end of the year, U.S. rates are expected to reach as high as 4.50%. If the Bank of Korea follows this month’s big step with a baby step (0.25 percentage points) increase next month, the interest rate gap between Korea and the U.S. will widen to 1.25 percentage points.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "The Fed’s rapid pace of rate hikes and the persistent domestic inflation have led the Bank of Korea to take an additional big step."

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