■ Bank of Korea to increase standard interest - Standard interest to increase annual 1.5%

The Bank of Korea has increased its benchmark interest rate six years and five months after June 2011, shifting to an era of tightening by closing the ultra-low interest rate era and tightening the money supply.

The Bank of Korea opened a monetary policy committee last month to raise its benchmark interest rate to 1.50%, up 0.25% from the current 1.25%. It was announced that the ‘liquidity era’, in which money was released to recover the economy, has come to an era of tightening with the interest rate increase.

The Bank of Korea has maintained its 1.25% interest rate for the past one year and six months since June last year after eight interest rate cuts since raising interest rates in June 2011.

The Bank of Korea stated that it has made the same decision in light of the possibility of an increase in the monetary policy rate of the world`s major economies, including the US, economic recovery, and household debt.

Meanwhile, Lee Ji-yeol, the head of Bank of Korea, told reporters at a briefing after the MPC that "Korean consumption, such as consumption and facility investment, will continue to recover moderately, while exports will continue to be robust with the recovery of the global economy and the improvement in trading profits. Gross domestic product (GDP) grew 1.4 % in the third quarter, and exports have been growing steadily since October. The Organization for Economic Cooperation and Development has revised its forecast for Korea`s economic growth this year from 2.6 percent to 3.2 %.

The problem of household debt as interest rates have been rising in the era of ultra-low interest rates, which currently exceeds KRW 1,400 trillion, has become the biggest issue of the Korean economy. The Bank of Korea estimates that if the interest rate on loans goes up by 0.25 % points, the interest burden on borrowers of household loans will increase by KRW 2.31 trillion. However, there is also a possibility that the rise in interest rates will be limited due to the fact that the interest rate hike has already started in line with the base rate increase.

Chief researcher of the Hyundai Economic Research Institute pointed out, "The issue of household debt due to the base rate hike is urgent. It should be added to the regulation of interest rate hikes and the regulation of household debt."

Especially, the Bank of Korea, which has shifted to the interest rate this year, is expected to raise its benchmark interest rate one or two more times next year, so household interest borrowers` interest burdens will increase. Economists expect the Bank of Korea to raise the benchmark interest rate to 2.0 % by the end of next year.

US interest rate hikes are also anticipated which will put pressure on the monetary authorities. If Korea has a lower interest rate than the United States, it can cause capital outflow. The Bank of Korea is higher than the current US policy rate (1.0-1.25% a year) due to the base rate hike, but it will be the same when the Fed raises interest rates as expected. "We will carefully examine the future growth and inflation trends to make further adjustments.”


By Lee Mi Jong lmj0919@


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