Benchmark Rate Raised to 3% After 1 Year and 9 Months... The Clock Is Ticking
The benchmark interest rate has climbed to an annual 3% for the first time in one year and nine months, and the monthly interest burden is growing for holders of variable-rate mortgage loans (home-backed loans whose interest rates fluctuate with market rates). The Bank of Korea raised its base rate in both July and August, and COFIX (the average rate banks pay to borrow funds), the benchmark for loan rates, also rose to an annual 3.18% in July—its fourth consecutive monthly gain and its highest level in one year and seven months.
Reflecting the rise in funding costs, banks have lifted their lending rates. KB Kookmin Bank raised its variable rate on new mortgage loans from 4.25–5.65% to 4.38–5.78%, while Woori Bank also hiked its rate from 4.56–5.76% to 4.69–5.89%.
The fallout from the rate hikes has spread from young homebuyers who stretched their finances to the limit and investors buying assets with borrowed money to small business owners and ordinary households. With economic indicators deteriorating across the board, the government has rolled out support measures for vulnerable borrowers.
Bank of Korea Governor Shin Hyun-song cited the early containment of spreading inflation and the stabilization of home prices and the foreign exchange rate as the reasons for raising the base rate.
Home prices continue to climb. In Seoul, gains are widening among mid-tier and lower-priced apartments in northern districts such as Gangbuk, while the greater capital region is also posting steep increases, led by its southern areas—including the 'semiconductor belt.' Home prices in Dongtan, near Samsung Electronics' Hwaseong and Giheung campuses, have already risen more than 16% this year.
Monetary policy at the world's major central banks is also tilting back toward tightening. As a growing number of central banks raise benchmark rates or prepare to do so, the U.S. Federal Reserve will decide on the 17th whether to raise rates in September. Fed Chair Kevin Warsh will make the call amid pressure from U.S. President Donald Trump to lower rates.
