South Korea raises interest rates for first time in nearly three years

SEOUL • Faced with surging household debt, South Korea raised interest rates for the first time in almost three years yesterday, becoming the first major Asian economy to start exiting record-low borrowing costs since the pandemic began.

Bank of Korea (BOK) governor Lee Ju-yeol maintained his hawkish tone and suggested the BOK could further tighten policy as data showed Asia's fourth-largest economy was overheating.

"We won't be doing things in a hurry, but we also won't hold off," Mr Lee said at a news conference, responding to a question about the timing for additional tightening.

"As for timing for the further hikes, we will consider how the Covid-19 situation plays out, and changes in the Fed's policy stance, which would have an important impact for us, as well as how the financial imbalances play out."

Mr Joo Sang-yong, a known dove on the BOK's board, was the only one of the six board members who voted to keep rates steady as the bank raised the benchmark interest rate by 25 basis points to 0.75 per cent, as expected by most analysts.

The BOK also pushed up its inflation projection to 2.1 per cent from 1.8 per cent previously, signalling conditions are building for further policy tightening.

Kyobo Securities' fixed-income analyst Paik Yoon-min, who now sees another hike in November, brought forward from January next year, said: "If there will be another rate hike within this year, it will likely be in November, given that there will be at least two to three rate hikes needed, including at (yesterday's) meeting, to address financial imbalances risk."

The benchmark Kospi fell sharply after the rate decision, while the South Korean won strengthened.

Policymakers had been signalling higher rates since May, but expectations for a hike were pared recently due to South Korea's latest Covid-19 outbreak, which forced the economy into semi-lockdown.

Central banks around the world are laying the groundwork for a transition away from crisis-era stimulus as what began as emergency support for collapsing growth now overheats many economies.

The BOK's move comes a day before United States Federal Reserve chairman Jerome Powell delivers his keynote address at the US central bank's annual Jackson Hole symposium, where he is expected to signal the future direction of US monetary policy.

Most central banks that have raised rates this year are in emerging economies, concerned about capital flight and imported inflation. In Asia, Sri Lanka raised rates last week, making it the first in the region to do so.

The BOK's decision represents a calculated risk that South Korea's export-driven economy, which has soared back from last year's pandemic slump, is healthy enough to start trimming stimulus especially as debt bingeing fast becomes an economic issue.

That contrasts with New Zealand, which last week delayed a widely expected interest rate hike as its first Covid-19 outbreak in six months cast uncertainty over its economic recovery.

Analysts expect the BOK to raise interest rates next year, with most seeing the base rate at 1.25 per cent by the end of next year, though comments from the BOK governor suggest the bank remains on a hawkish footing.

The policy decision is the first rate review the BOK has had as a six-member body after board member Koh Seung-beom left the board to head the Financial Services Commission regulatory body.

There are two more interest rate review meetings scheduled this year.

REUTERS