Take pre-emptive action
BOK hints at additional interest rate hike
The Bank of Korea (BOK) froze its key interest rate at 0.75 percent Tuesday amid growing economic and financial uncertainties at home and abroad. Yet it hinted at a rate hike soon, possibly next month, in order to curb mounting inflationary pressure and snowballing household debt.
The rate freeze comes after the BOK raised its benchmark rate by 0.25 percentage points in August. Since then the central bank has signaled more rate increases to address financial imbalances and ensure sustainable economic growth.
However, the BOK decided to leave the rate unchanged during this month’s Monetary Policy Board meeting. Sluggish economic indicators amid the persistent COVID-19 pandemic and the volatile stock market were cited as major reasons for keeping the rate intact. The U.S. Federal Reserve’s impending tapering of asset purchases and a feared default by China’s real estate developer Evergrande Group are also destabilizing factors.
Against this backdrop, the central bank’s decision was inevitable. But it cannot and should not delay propping up the interest rate any further. Pre-emptive action is required because a rate cut or hike takes three to six months to produce its intended results. In this sense, the BOK appears to be somewhat late to begin the process of monetary tightening.
The BOK has maintained a low interest rate policy too long since it cut its key rate to a record low of 0.5 percent in May 2020 following the outbreak of the pandemic. This policy, of course, has contributed to stimulating the economy hit hard by the unprecedented public health crisis.
But the accommodative monetary policy has caused serious side-effects such as asset bubbles in the housing and stock markets. Household debt has hit an all-time high of 1,800 trillion won ($1.5 trillion). Concerns are growing that the ticking debt bomb could explode suddenly unless any significant steps are taken.
Soaring prices of oil, natural gas and coal on international markets are also trigging more inflationary pressure. Making matters worse, the Korean won is on a downward march against the U.S. dollar. On the Seoul foreign exchange market Tuesday, the local currency briefly tumbled below 1,200 won against the greenback, hitting its lowest level in 15 months.
The consumer price index surged 2.5 percent year-on-year in September, extending the growth of inflation by more than 2 percent for six months in a row. The BOK is unlikely to meet its goal of keeping inflation under 2 percent this year. Meanwhile, it predicts the economy to grow 4 percent in 2021. But such a robust recovery is meaningless if the people, particularly low-income workers, suffer under an unchecked inflationary spiral.
Another serious problem is the financial authorities’ move to curb the extension of household loans, as part of their efforts to reduce runaway individual debt. However, this move is making it harder and harder for people to get bank loans for rental deposits. So more and more borrowers are forced to borrow from nonbanking financial firms which demand higher interest payments. Policymakers need to take measures to help such borrowers stabilize their livelihoods.