[Base Rate 3%] Yoon Government on the Test Amid 'Inflation, Interest, and Exchange Rate Bomb' Tsunami (Comprehensive)

The Bank of Korea Raises Rate by 0.5%P in Second Big Step... Inflation Fear Sparks Interest Rate Anxiety
Yoon Economic Team Takes Over Big Step Baton, Struggles Without Breakthrough for 3 Highs

[Asia Economy reporters Seo So-jeong, Kwon Hae-young in Sejong, and Moon Je-won] The Bank of Korea has implemented a 'big step' by raising the base interest rate by 0.50 percentage points at once after three months. This is the second big step and also the first-ever five consecutive rate hikes in history. 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 continues at the last Monetary Policy Committee meeting of the year next month following this month, the year-end base interest rate could rise up to 3.5%.

BOK raises base interest rate by 0.50%p... Arrival of the 3% interest rate era

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 interest rate was raised by 0.25 percentage points each in January and April, and in July, it was increased by 0.50 percentage points, marking the first-ever big step. Subsequently, 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. ▶Related articles on pages 3 and 4

Amid growing concerns about a global economic recession, the Bank of Korea's unprecedented move of five consecutive rate hikes is due to the more urgent need to 'control inflation.' The consumer price index in September (108.93) rose by 5.6% compared to the same month last year. Although the rate of increase has decreased for two consecutive months following August (5.7%), it remains firmly in 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, the U.S. rate is expected to reach up to 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 rate hikes and the persistent domestic inflation have led the Bank of Korea to take an additional big step."

'Inflation, Interest, Exchange Rate Bomb' Complex Crisis Tsunami... Yoon Government Economic Team Faces Test

#Mr. A borrowed about 460 million won from a bank two years ago to purchase a 30-pyeong apartment in Jung-gu, Seoul. The mortgage loan interest rate applied for the first six months was 2.91% per annum, but it jumped to 5.07% this month, two years later. Mr. A's monthly principal and interest repayment on the mortgage loan increased from 1.94 million won to 2.49 million won, an increase of more than 500,000 won. Assuming that Mr. A's loan interest rate simply rises by 0.5 percentage points a few months after the Bank of Korea's rate hike on the 12th, the monthly principal and interest repayment would be about 2.65 million won. Mr. A said, "Since I am repaying the loan with equal principal and interest payments, the interest burden feels heavier," adding, "I am considering refinancing the loan even if I have to pay a prepayment penalty."

As the Bank of Korea took the expected 'big step' (a 0.5 percentage point increase in the base interest rate at once), the South Korean government is deeply concerned about facing a complex economic crisis triggered by external factors. Although raising interest rates is an inevitable measure to curb soaring inflation and exchange rates, the interest burden on households and companies is ballooning, and the economy, which is already expected to slow down next year, may cool even faster. The Yoon Seok-yeol administration's economic team, which must simultaneously step on the 'brake' and 'accelerator' amid the dilemma of stabilizing inflation, interest rates, and exchange rates while maintaining growth, is also on the test bench.

According to the Bank of Korea, with the Monetary Policy Committee raising the base interest rate by 0.50 percentage points today, the average annual interest burden per borrower is analyzed to increase by 327,000 won to 3,821,000 won. Since the base interest rate has been raised eight times by a total of 2.5 percentage points from last August to today, the interest cost per person has increased by a whopping 1,635,000 won compared to a year ago. The interest burden per household is even greater. When the interest rate rises by 0.50 percentage points, it increases by as much as 502,000 won, which is effectively at the level of an 'interest bomb.'

The problem is that low- and middle-income groups vulnerable to high interest rates, the '2030 Young-chul' youth group who have borrowed heavily, and self-employed people with multiple debts are likely to be hit hardest. The upper limit of mortgage loan interest rates at commercial banks has already exceeded 7%, and the 8% mark is imminent. Companies are no exception. Not only small and medium-sized enterprises but also large corporations are struggling to pay interest. The Federation of Korean Industries revealed that 3 to 4 out of 10 large companies currently cannot cover interest expenses with operating profits. This raises concerns about simultaneous insolvency of households and companies.

The Monetary Policy Committee of the Bank of Korea held a meeting on the 12th to decide on the direction of monetary policy and decided on a 'big step' increase, raising the base interest rate by 0.50 percentage points at once from the current 2.50%. On the same day, a notice of today's interest rate was posted on the exterior wall of a commercial bank in downtown Seoul. Photo by Moon Honam munonam@

Amid spreading fears of an economic recession next year, another problem is that too rapid interest rate hikes could further worsen the economic situation. On the 11th (local time), the International Monetary Fund (IMF) projected the global economic growth rate for next year at 2.7% and South Korea's growth rate at 2.0%. These figures were lowered by 0.2 and 0.1 percentage points, respectively, compared to the previous forecast released in July. There is also the possibility that the Bank of Korea's liquidity reduction could completely extinguish the faint embers of the cooling economy. Earlier, the United Nations urged central banks worldwide, including the U.S., to refrain from tightening, recognizing this situation.

The problem is that despite risks such as the interest bomb and economic recession, it is difficult to avoid raising interest rates to stabilize inflation and exchange rates. This is because the high inflation rate in the 5?6% range is becoming entrenched, and the exchange rate is soaring due to the interest rate gap between Korea and the U.S. caused by the U.S. rate hikes. For the economic team, raising rates increases the risk of household and corporate insolvency and the possibility of recession, while lowering rates causes inflation and exchange rates to soar, putting them in a difficult situation where neither option is easy. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho previously lamented the difficult situation, saying, "The complex crisis of high inflation, slowing economy, and financial market volatility will continue."

Experts point out that due to external factors such as the Ukraine war, U.S. rate hikes, and economic slowdowns in China and Europe, inflation and exchange rates are soaring and recession concerns are growing, leaving almost no policy options. However, they advise prioritizing inflation mitigation because failure to control inflation would shrink consumption and negatively impact the economy.

Professor Sung said, "Due to the U.S.'s steep rate hike trend, the depreciation of our currency is severe, and internally inflation is soaring," adding, "The economic team has no choice but to prioritize rate hikes and coordinate policies to find the optimal policy mix." Joo Won, head of the Economic Research Department at Hyundai Research Institute, said, "If an urgent situation such as a recession occurs next year, the government seems to have no sharp measures other than preparing a supplementary budget (Chugyeong)."

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