August 26, 2021

South Korea raises interest rates, the first major Asian economy to do so since pandemic began

By ellen

SEOUL (REUTERS, BLOOMBERG) – South Korea raised interest rates for the first time in almost three years on Thursday (Aug 26), becoming the first major Asian economy to start exiting record-low borrowing costs since the pandemic began to curb surging household debt.

The Bank of Korea’s (BOK) monetary policy board raised the benchmark interest rate by 25 basis points to 0.75 per cent, as expected by 16 of 30 analysts surveyed by Reuters.

The benchmark Kospi stock index fell sharply after the rate decision, while the South Korean won strengthened. September futures on three-year treasury bonds rose after the rate hike but reversed gains soon after.

Policymakers had been signaling higher rates since May but expectations for a hike were pared recently due to the latest Covid-19 outbreak, which forced Asia’s fourth-largest economy into semi-lockdown in July.

Central banks around the world are laying the groundwork for a transition away from crisis-era stimulus as what began as emergency support for collapsing growth now overheats many economies.

Most central banks that have raised rates this year are among emerging economies concerned about capital flight and imported inflation. In Asia, Sri Lanka raised rates last week, making it the first in the region to do so.

Analysts say South Korea needs to be ahead of the curve as surging household debt and home prices threaten financial stability.

“BOK’s concerns about financial imbalances may outweigh the downside risk to economic growth from the Delta variant,” said Mr Kim Jin-wook, an analyst at Citibank said in a report ahead of the decision.

“We now bring forward the timing of our second hike call to 1.00 per cent, to November 2021 from January 2022.”

On Thursday, the BOK maintained its economic outlook at 4 per cent for this year but upgraded consumer inflation for this year to 2.1 per cent from 1.8 per cent previously, signaling conditions are building for policy tightening.

Analysts expect the BOK to raise interest rates next year, with most seeing the base rate at 1.25 per cent by end-2022.

The policy decision is the first rate review the BOK has had as a six-member body after board member Koh Seung-beom left the board to head the Financial Services Commission regulatory body.

There are two more interest rate review meetings scheduled this year.