Base rate goes up along with inflation prediction

The Bank of Korea's monetary policy board decides on Thursday to raise the country's base interest rate by 25 basis points to 1 percent. [BANK OF KOREA]

The Bank of Korea (BOK) raised the country’s base interest rate for the second time since the start of the pandemic on Thursday, and jacked up its inflation outlook.

The monetary policy board of the central bank raised the country’s base rate by 25 basis points to 1 percent as widely expected. It was the first time in 20 months that the base rate bounced back to the 1 percent level.

The rate was lowered twice last year, ending at a historic low of 0.5 percent as the coronavirus pandemic swept the country.

Korea is now ahead of many countries in returning its monetary policies to pre-pandemic levels. Korea was the first major Asian economy to raise rates after the pandemic last August, when it raised the country’s key rate by 25 basis points to 0.75 percent. Other major central banks including the U.S. Federal Reserve and the European Central Bank have yet to raise rates.

The hike was highly anticipated as consumer prices rise sharply along with household debt.

Consumer prices last month were up 3.2 percent compared to the same month a year ago, led by soaring fuel prices, according to data from Statistics Korea early this month. That was the sharpest growth in nearly 10 years.

Household debt continued to mount in the third quarter even with financial regulators pressuring banks to tighten lending. In the third quarter, household debt hit a record 1,844.9 trillion won ($1.55 trillion), 9.7 percent higher than a year before, according to central bank data released Tuesday.

“The rate decision was as expected,” said Kim Jina, an analyst from IBK Securities. “We expect another rate hike in the first quarter next year in a move to bring back rates to the pre-pandemic level.”

During an online press briefing held Thursday, BOK Gov. Lee Ju-yeol said the central bank intends to raise rates in line with the speed of economic recovery.

He said that raising rates should be seen as bringing them back to normal, pre-pandemic levels rather than tightening monetary policy.

“It is obviously necessary for the central bank to normalize rates that have been extraordinarily low during the pandemic,” Lee said. He added that he believes the current rate is still accommodative considering rising consumer prices and a growing economy.

“I don’t see why we should rule out the possibility of a rate hike in the first quarter of next year, though it would depend on the economic indices,” Lee said.

Questioned whether the BOK is raising interest rates too fast, Lee said he understood the worry that rate hikes could hurt the economic recovery and dampen private consumption, but said the monetary policy board monitors inflation and major indices related to economic growth before coming to its decisions. He added that keeping rates steady while consumer prices soar would actually mean the monetary policy is becoming even more accommodative.

On Thursday, the central bank revised its inflation outlook while keeping its economic growth outlook the same.

The bank expects the country’s gross domestic product to grow by 4 percent this year and 3 percent next year, consistent with projections made in August.

The bank upped this year’s inflation outlook by 0.2 percentage points to 2.3 percent. The central bank sees global supply chain bottlenecks and rises in commodity prices led by crude as risk factors to the country’s economy and sources of inflation.

Thursday's meeting was the last rate-setting meeting of the year. While a rate hike was supported by majority of the monetary policy board members, one member voted to maintain the rate at 0.75 percent.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]