BOK raises base interest rate by 0.25 percentage points

The Bank of Korea (BOK) raised the base interest rate by 0.25 percentage points for the first time in one year and three months to tackle the financial imbalance fueling the swelling household debt and the surging housing prices. This marks the end of an era of ultra low interest rates dragged down to 0.5 percent in May last year in a bid to cushion the shock from the COVID-19 pandemic.

With an additional bump-up scheduled by the end of this year, it will deal a heavy blow to low-income families, debt-ridden individual investors, and financially vulnerable SMEs.

On Thursday, the central bank held a monetary policy board meeting and raised the annual key interest rate from 0.5 to 0.75 percent. This was the first uptick of the base rate in 15 months since May last year. The last time the central bank raised the base rates was in November 2018 (1.50 percent to 1.75 percent), the first in two years and nine months.

“Our decision is based on three reasons: a sustained economic recovery, an increasing inflationary pressure, and accumulating risks of financial imbalance,” BOK Governor Lee Ju-yeol said in a press conference after the meeting. The BOK pushed up the consumer price inflation rate from 1.8 to 2.1 percent while sticking to its projection of a 4.0-percent rate of economic growth.

“It is only our first step towards alleviating the entrenched financial imbalance,” said Governor Lee. “Even with the uptick of 0.25 percent points, the current rates are still low.” His comment points to the possibility of a further rise of interest rate in the latter half of the year. Experts predict that an additional growth of 0.25 percent points might be applied in October or November, ushering in an era of 1 percent interest rate within this year.

With the size of local household debt surpassing the mark of 1,800 trillion won, it is estimated that the uptick of interest rate will add a total 3.1 trillion won of interest burden. “The rise of interest rate will pose a great difficulty to low-income families amid the COVID 19-induced crisis,” Governor Lee added. “An effort will be needed to concentrate support on the vulnerable, and this should be handled initially by the public finance.”

The financial market, however, remained relatively calm despite the abrupt news. KOSPI closed at 3,128.53, down 0.58 percent from a day before, and KOSDAQ rose 0.26 percent. Pundits say the bump-up has already been reflected in the stock market thanks to the steady signals from the central bank from late May this year.


Hee-Chang Park ramblas@donga.com