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Bank of Korea keeps interest rate steady, further hikes expected in future
Updated: 2021-10-12 17:06:23 KST
South Koreans have been taking out more loans than ever before amid ultra-low interest rates.
With the debt piling up, real estate prices have soared in recent months. Consumer prices have also been rising above the government's target of two percent for the sixth straight month.
To help curb the country's house prices, household debt and inflation, policymakers have been signaling the rise in interest rates since May.
For more on Korea's monetary policy, we have our Eum Ji-young today here in the studio.
Ji-young, good to have you here today.

Good evening Connyoung.

Jiyoung, despite the financial imbalances continuing under the eased monetary policy, the Bank of Korea decided today to keep its benchmark interest rate steady at point-seven-five percent.

Yes Connyoung. As you said, considering the surge in household debt and the inflationary pressure, it could have been the right time for the central bank to raise its benchmark rate.
But it seems the economic repercussions from the surge in virus cases and volatility on the stock market have delayed the hike.
During its monetary policy meeting on Tuesday, South Korea's central bank decided to freeze its benchmark rate at point-seven-five percent.
The BOK explained that it made the decision after taking market conditions into account.

"The local financial market has been significantly affected by the volatility in the global financial market. For instance, China's growth has slowed down with concerns over the energy crisis, and with this, other emerging markets have also shown a sluggish recovery."

Earlier in August, the country became the first major Asian economy to hike interest rates this year.

You are absolutely right Connyoung. After a long wait, South Korea's central bank pulled the trigger by raising the key rate by point-two-five percentage points in August. It was the first nudge higher since November 2018.
This happened after the central bank had made several cuts to its key interest rate amid the pandemic woes.
It cut the rate to point-seven-five percent in March last year and once more to a record low point-five percent in May 2020.
The hike was mainly aimed at tackling the country's huge household debt and the overheated housing market, which has skyrocketed due to the excessive amount of liquidity.
People borrowing to invest also drove the rapid growth in household debt this year.
South Korea's household debt reached an all-time high in August, recording more than 873 billion dollars.
But experts say, with the rate hike in August combined with the government's policies to rein in household debt, the rate of increase in mortgage loans in August fell compared to a month before.
Also, the increase in credit and other loans in August has dropped to about a tenth of the rise in the previous month.

Even though the bank kept its key rate steady this time in October,… it is widely expected that it will continue to raise the rate in the near future.

Right Connyoung. The central bank said there could be a rate hike next month.

"Next year, the economy is forecast to have solid growth and inflationary pressure is to be stronger than previously expected. Thus, the current monetary easing policy will be adjusted and if the economic situation flows as expected, there could be an additional hike in the key rate."

The Bank of Korea said when the base rate rises by point-two-five percentage points, household debt is expected to decrease by point-four percentage points and house prices are forecast to fall by point-two-five percentage points.
Also, it is estimated that the country's GDP will contract by point-one percentage points and inflation will be reduced by point-zero-four percentage points.
An expert said that the rate is to be raised as the economy is expected to gradually recover under the 'With COVID' scheme where we live with coronavirus in the same way as we live with seasonal flu.

"The central bank will raise rates by point-two-five percentage points within this year and will increase it further to one.two-five or one.five percent next year. The implementation of the 'With COVID' scheme means that the economy will soon return to normal."

A report released by a local think tank Hana Institute of Finance also predicted that the rate will be raised to the level before the pandemic within next year.

"There was a rate increase in August and another hike is expected in the fourth quarter of this year. Also, the central bank is likely to raise it once more in the second half of next year to the level before the pandemic,at one.two-five percent."

He also said the Federal Reserve's 'tapering' -- the process of slowly pulling back the unprecedented financial stimulus that has been given out by buying at least 120 billion U.S. dollars of bonds each month during the COVID-19 outbreak -- is to start in the fourth quarter of this year.
He added that after the tapering process has started, the U.S.'s basis rate is to be raised, beginning in the fourth quarter of next year.

"Tapering and the rise in the U.S. key rate has the effect of contracting liquidity around the world. Therefore, it will act to raise interest rates globally and I believe South Korea would be no exception."

But a rate hike will increase the burden on indebted households and companies. What could be some of the repercussions on those who are financially vulnerable?

Connyoung, one of the major problems would be the increasing burden of interest on households and particularly on those small business owners who took out loans as they were hit hard by the pandemic.

"It has been 17 years since I opened this restaurant and the revenue these days is at a record low. 1.5 million won per month is going out of my bank account to pay both the interest and the principal of the loan provided for small business owners. I'm having difficult time because the interest that I have to pay is rising as it was loaned out with a variable rate."

"About 20 percent of South Korea's citizens are small business owners and they have been suffering financially due to COVID-19 during the last two years. It would be a good idea to exempt a certain amount of loan payments or extend the maturity of the debt."

He also stressed that fiscal policy dedicated to a selective group who really need to take out loans including those who need funds to pay rent, as well as first home buyers would be necessary.

Ji-young, thank you for the thorough reporting today.

Thank you for having me.
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