Bank of Korea Raises Base Interest Rate to 3.5%... First Ever 7 Consecutive Hikes

Raised by 2.0%p Since April Last Year
Same Level as December 2008

Lee Chang-yong, Governor of the Bank of Korea, is explaining the base interest rate hike at a press conference held on the 13th at the Bank of Korea in Jung-gu, Seoul. The Monetary Policy Committee of the Bank of Korea raised the base interest rate by 0.25 percentage points from 3.25% to 3.50% on the same day. Photo by Joint Press Corps

[Asia Economy Reporter Seo So-jeong] The Bank of Korea raised the base interest rate by 0.25 percentage points to an annual rate of 3.5% at the Monetary Policy Committee meeting on the 13th. The Monetary Policy Committee had previously raised the base rate in meetings held in April, May, July, August, October, and November of last year, and with this first meeting of the year, it has set a record for the first-ever seven consecutive rate hikes. The rate hike was implemented to narrow the interest rate gap with the United States amid continued high consumer price inflation in the 5% range and expectations of ongoing tightening by the U.S. Federal Reserve (Fed).

The Bank of Korea's Monetary Policy Committee held a meeting to decide on monetary policy direction and raised the base interest rate from 3.25% to 3.50% per annum. Last year, the base rate was raised by 0.25 percentage points in January, April, and May, by 0.50 percentage points in July, 0.25 percentage points in August, 0.50 percentage points in October, and 0.25 percentage points in November. With this additional increase this month, the rate has returned to 3.5% for the first time in 14 years and 1 month since December 2008.

The reason for the additional rate hike by the Bank of Korea is the persistent inflationary pressure. The consumer price inflation rate in December last year rose by 5% compared to the previous year. After peaking at 6.3% in July last year, it has remained above 5% for eight consecutive months since May. Last year’s consumer prices rose by 5.1% compared to the previous year, marking the highest level in 24 years since the 1998 foreign exchange crisis (7.5%). With the consumer price inflation rate far exceeding the target level (2%), the monetary policy stance focused on price stability is inevitable for the time being. The expected inflation rate, which corresponds to the consumer price inflation forecast for the next year, was still high at 3.8% in December last year.

Additionally, considering the current interest rate gap of up to 1.25 percentage points with the United States, further base rate hikes are deemed unavoidable. With the Bank of Korea’s 0.25 percentage point increase on this day, the interest rate gap between Korea and the U.S. narrowed to 1 percentage point.

Bank of Korea Governor Lee Chang-yong emphasized in his New Year’s address on the 2nd, "Prices, which are most important to the lives of the people, are expected to continue rising above the target level," and added, "Monetary policy must continue to focus on price stability."

Kim Jeong-sik, Professor Emeritus of Economics at Yonsei University, said, "The Monetary Policy Committee raised the base rate because the high inflation in the 5% range persists and external monetary tightening pressures remain. However, due to this year’s global economic recession, the impact of successive rate hikes, and the rapidly frozen domestic real estate market, the need to adjust the pace of monetary policy has increased, and the final rate is expected to be decided between 3.5% and 3.75%."

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