Easy does it on rate hikesThe Bank of Korea’s monetary policy committee moved for the first time in 17 months to raise benchmark interest rates from a record low of 2 percent, announcing last week an increase of 25 basis points.
Although most market analysts predicted that the central bank would stand pat this month, the hike came as little surprise to the financial markets. Financial authorities, after all, already warned of a pre-emptive monetary move to contain inflationary risks and highlighted the dangers of an asset bubble and increasing debt stemming from a prolonged period of low interest rates.
We have repeatedly advised that the country must be timely in unwinding policies that helped prop up the economy during the downturn, calling for such moves when the nation is walking solidly along the path to a recovery.
The International Monetary Fund and both domestic and international economic think tanks have recommended a rate hike here in sync with similar moves in other parts of Asia. The monetary direction was already set, so it was just a matter of time before we saw real action.
A hike in the key interest rate sends ripples through every corner of the economy. It will fan a similar move in lending rates to households and corporate clients, meaning it will also affect the real estate market. It will increase loan rates to consumer borrowers to the tune of 1.25 trillion won ($1 billion). Small corporate borrowers might also have to pay 1 trillion won more in interest rates. The move therefore will likely serve as a death sentence for the real estate market, which is already reeling. But since the central bank signaled a change in monetary policy to accommodate the economic recovery, everyone will have to learn to adapt.
The rate move was moderate, which was widely expected by the financial markets. Stock and bond markets also remained unfazed. Bank of Korea Governor Kim Choong-soo assured the public that it is too early to say whether a full unwinding of accommodative policies has begun. But now that interest rates are northbound, we cannot rule out additional hikes in the coming months.
Still, there is no need to turn jittery. Although consumer prices have been hovering above expected levels, there are no signs of serious inflationary problems. The central bank should be discreet in making further hikes to avoid unnecessarily scaring or upsetting the market. It must give household and corporate borrowers some time to absorb new loan rates before making additional moves. The global economy is still in danger of falling into a double-dip recession, and the local real estate market remains depressed.