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S. Korea becomes first major Asian economy to increase interest rates

S. Korea becomes first major Asian economy to increase interest rates

South Korea has reportedly raised interest rates for the first time in almost three years amid the increasing issue of growing household debt. This makes the country the first key economy in Asia to take such a step since the beginning of the COVID-19 pandemic.   

Governor the Bank of Korea (BOK), Lee Ju-yeol stated that the apex bank is expected to further tighten the policy as data showed that the economy was overheating. Ju-yeol further stated that the BOK will not go fast with this but will stick to the plan.  

Speaking about the timing for the further hikes, Lee mentioned that the BOK will consider how the pandemic situation turns out, changes in the policy stance and how the financial imbalances play out.

Joo Sang-yong, prominent member on the BOK’s board was reportedly the only one of the six members who voted in the favor of keeping the rates steady as the bank elevated the benchmark interest rate 25 basis points to 0.75%.  

Sources have reported that the BOK had increased its inflation projection to 2.1% over the previous 1.8%, implying building of conditions for further policy tightening.

The benchmark KOSPI (Korea Composite Stock Price Index) showed a drastic decline after this decision, while the South Korean won was strengthened.

For the record, the policymakers had been indicating higher rates since May. However, the expectations regarding the hike were diminished lately due to the recent outbreak of Covid-19 in South Korea, which led to semi-lockdown in the country.

The BOK’s move apparently comes a day before the chair of Federal Reserve, Jerome Powell’s addressal at the annual Jackson Hole symposium of the US central bank. At the symposium, Powell is expected to speak about the future direction of US monetary policy.

Analysts speculate that the BOK will raise the interest rates in 2022, with the base rate expected to reach 1.25% by the end of the next year. However, Governor Lee suggests that the bank will maintain its hawkish stance.

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