"Base Rate Hike Slows Real Economy, Full Impact This Year... Greater Effect Than Past Hikes"

The Bank of Korea's Monetary and Credit Policy Report
Base Interest Rate Raised by 3%P, Growth Rate and Inflation Lowered by Over 1%P

As the era of a 3% base interest rate opens for the first time in 10 years, commercial banks have been raising deposit interest rates one after another, bringing bank fixed deposit rates close to 5% per annum. On the 26th, a banner displaying the interest rate for fixed installment savings was posted at a commercial bank in Seoul. Photo by Jinhyung Kang aymsdream@

Since August 2021, the base interest rate has been sharply raised by 3 percentage points, and the impact of the base rate hike on slowing growth and inflation is expected to become more pronounced this year. Additionally, due to the interest rate increases over the past year and a half, it is analyzed that the gross domestic product (GDP) growth rate and consumer price inflation rate will each decline by more than 1 percentage point.

On the 9th, the Bank of Korea stated in its Monetary and Credit Policy Report, "The effects of the base rate hike on slowing growth and inflation have gradually appeared since the second half of last year," and added, "Considering the policy lag, the impact on the real economy slowdown is expected to be more significant this year."

The Bank of Korea analyzed that since August 2021, the base interest rate has risen by 3.00 percentage points over 10 times, and the cumulative effect is expected to reduce this year's GDP growth rate by 1.4 percentage points and the consumer price inflation rate by 1.3 percentage points.

According to the report, real consumption and inflation have both slowed since the third quarter of last year, and the contribution of monetary policy to growth and inflation began to shrink from the third quarter of last year, turning negative after the fourth quarter.

Since the base interest rate hikes since August 2021 have been large and rapid, the impact on market interest rates, liquidity conditions, and the Financial Conditions Index (FCI) was greater than during previous rate hike periods. The pass-through effect of the base rate hike on government bond yields and deposit and loan interest rates was higher than in previous tightening periods (July 2010?June 2011, November 2017?November 2018), and generally similar to the period from October 2005 to August 2008.

The broad money supply (M2) growth rate is the lowest since the July 2010?June 2011 tightening period, and the FCI shows that this year is the most restrictive among all past tightening periods.

In the foreign exchange sector, it was analyzed that the base rate hike partially mitigated the upward pressure on the exchange rate caused by the rapid tightening of the U.S. Federal Reserve (Fed).

The Bank of Korea said, "As funding costs rise, household debt decreases and housing prices fall, alleviating the financial imbalance risks that had accumulated over a long period," but added, "However, since housing prices and household debt remain at high levels, it is necessary to gradually and continuously reduce financial imbalances over the long term."

Furthermore, the report diagnosed that under the current financial and economic conditions, there are factors that can both amplify and reduce the transmission effects of the rate hikes compared to the average past levels. High household debt ratios and tight base interest rate levels are factors that amplify the transmission effects, while increases in public utility fees and the resulting inflation expectations weaken the inflation-slowing effect of the rate hikes.

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