South Korea raises interest rates right in the middle of the pandemic

First developed economy to raise interest rates amid pandemic

South Korea became the first developed economy in the world to decide to raise the basic interest rate right in the middle of the Covid-19 pandemic.

Bank of Korea (BoK) headquarters. Photo: Reuters

The Bank of Korea (BoK) this morning announced an interest rate increase, a decision attributed to heating up financial risks, despite the threat from Covid-19. Accordingly, the agency raised interest rates by 25 basis points to 0.75%. This is the first interest rate hike by the Bank of Korea in nearly three years.

Bank of Korea Governor Lee Ju-yeol said the decision to raise interest rates was not unanimous because there was a dissenting member of the Board of Directors, calling for keeping interest rates stable. This split of opinion on monetary policy was predicted by analysts in an earlier Reuters poll that only 16 out of 30 Bank of Korea board members were looking forward to a rate hike on Monday. 26/8.

Alvin Tan, Asia head of foreign exchange strategy at RBC Capital Markets, described the move by the Bank of Korea as a “reluctant rate hike”, although the market “fully expects a string of gains”. interest rate”.

On the Korean stock market, the Kospi index fell 0.18% after the news that the Bank of Korea raised interest rates. In contrast, the Korean won rose slightly.

Most central banks globally have lowered interest rates to record lows in an attempt to bail out economies hit by the Covid-19 pandemic. From the US to Europe and Asia, governments here have been implementing many stimulus measures to support businesses.

“It must be affirmed that Covid-19 remains a major challenge for the economic recovery,” said Capital Economics, an economic research and consulting firm, after the Bank of Korea’s interest rate hike.

Because, South Korea has struggled with a high number of Covid-19 infections in recent weeks, with the average number of daily infections for 7 days skyrocketing to 1,800, 4.5 times more than 400 cases in June, according to data from Our World in Data.

Last week, South Korea extended the application of social distancing measures by two weeks due to the high number of Covid-19 infections, according to Reuters.

Analysts at Capital Economics said that the Korean economy has become increasingly resilient to Covid-19 outbreaks and that accelerating vaccination will help the country soon transition to “easy” anti-epidemic measures. breathe” more.

However, Capital Economics warned of financial risks facing the Korean economy, such as rising house prices and an increase of 14.3% in July alone compared to the same period last year. Meanwhile, household debt in the second quarter also increased by 10% over the same period last year.

Mr. James Lee, chief economist for Japan and Korea markets at HSBC Group, said he would not rule out the possibility of further monetary tightening.

“Financial stability risks, such as household debt balances and rising housing prices, are an issue not only this year, or last year, but at least in the past five years. So when there is opportunity… The Bank of Korea will continue to normalize interest rate policy,” Mr. James Lee commented on CNBC.

This expert predicted, the Bank of Korea will “keep the door open for further policy actions”. “But whether they can really hike rates will depend a lot on future growth prospects,” Lee added.