Korea: BOK raises interest rates in November
At its 30 November monetary policy meeting, the Bank of Korea (BOK) raised the base rate for the first time in a year from 1.50% to 1.75%. This came amid high household debt growth and rising interest rates in major economies such as the United States. Most analysts expected the BOK to make this move, partly due to the increased hawkishness at the previous monetary policy meeting.
The increase in household lending accelerated in October, although the pace of housing price increases slowed somewhat, likely due to the government’s recent measures to stabilize the housing market. On a wider perspective, the economy has grown at its potential rate in recent quarters, as the Bank noted. Going forward, growth will likely be sustained at current levels according to the Bank’s forecasts, although investment is expected to grow at a moderated pace. Despite inflation hitting 2% in October, which is exactly the Bank of Korea’s target rate, it is seen slowing in the coming months. Overall, despite an expectation of moderated inflation, continued financial imbalances in Korea, coupled with interest rate hikes in other major economies, were apparently enough for the BOK to take November’s decision.
Looking ahead, analysts at Nomura said:
“We believe that the negative output gap will widen as the economy undergoes major restructuring in the manufacturing (e.g., auto and shipbuilding) and service sectors due to rapid minimum wage hikes. We also believe today’s rate hike, in association with the government’s tighter measures on the housing market, will slow household debt growth further into 2019. Our U.S. Economics team believes that the Fed’s rate hike cycle will be complete in the middle of 2019. […] Therefore, we expect the BOK to stay on hold at 1.75% in 2019 and deliver a 25bp rate cut to 1.50% in 2020.”
For its part, the Bank of Korea said it will continue to conduct monetary policy to support economic growth and stable inflation, while paying attention to financial stability. The BOK stated that it still considers its policy stance to be accommodative. The next monetary policy meeting is set for 24 January.