Base Rate Returns to 3% Era After a Year and Nine Months
The Bank of Korea's Monetary Policy Committee on the 27th of last month raised the base rate—the policy rate that serves as the benchmark for market rates—by 0.25 percentage points, from an annual 2.75% to 3.00%, bringing it back to the 3% level for the first time in a year and nine months. The BOK had pivoted back to monetary tightening—a policy of curbing prices by reducing the amount of money circulating in the market—in July for the first time in three years and six months, and delivered another hike just one month later. It is the first time since the call rate target system (the rate at which banks borrow and lend money to one another overnight) was introduced in 1999 that the central bank has raised rates in succession immediately after launching a tightening cycle. Governor Shin Hyun-song invoked the Korean proverb that what fails to be stopped with a hoe ends up having to be stopped with a spade, saying, "This time, we have decided to wield the hoe."
Rising prices lay behind the latest hike. Core inflation under the OECD method, which excludes food and energy, climbed from 2.0% early this year to 2.5% in May and 2.6% in July before reaching 3.4% in August—a widening of 0.8 percentage points in the single month between July and August. The Bank of Korea judged that the economic boom driven by the semiconductor upswing was lifting purchasing power and that inflationary pressures could spread broadly as a result. Rising home prices, centered on the capital region, and the pace of household debt growth were also cited as factors behind the decision.
The median of the dot plot showing committee members' base rate projections six months ahead came in at an annual 3.25%. Global investment bank Morgan Stanley has suggested the base rate could climb to 3.5% in the first quarter of next year. Governor Shin explained that every Monetary Policy Committee meeting going forward would be a "live" one.
Household debt has surpassed 2,000 trillion won, an all-time high, and borrowers' interest burdens are mounting. Indeed, the top rate on five-year fixed-rate mortgages at the five major commercial banks has exceeded 7% a year, and the top end of credit loan rates has re-entered the 6% range. Rates applied at bank lending counters are already running well above the base rate.
Against this backdrop, Kang In-su, an economics professor at Sookmyung Women's University, pointed out the need to strengthen targeted support for financially vulnerable households. "It is necessary to carefully assess each borrower's ability to repay and further expand differentiated policies that actually work," Professor Kang added.
