South Korea yesterday raised its key interest rate for the first time in a year, in a bid to curb snowballing household debt and a housing price hike casting a pall over Asia’s fourth-largest economy.
The Bank of Korea (BOK) raised the benchmark overnight inter-bank lending rate by a quarter point to 1.75 percent — the first rate hike since November last year.
Outstanding household debt in the world’s 11th-largest economy hit a record 1,514 trillion won (US$1.35 trillion) as of late September, while housing prices have surged.
House prices in Seoul and its suburbs — home to half of the country’s 50 million people — rose 3 percent from January to October this year, the highest in three years.
BOK Governor Lee Ju-yeol said the rate increase was expected to ease financial imbalances, such as a widening gap between South Korean and US rates, and record household debt.
“The BOK concluded there is a need to raise the benchmark rate, due to the possibility that risks to financial stability could rise should the central bank continue to leave rates on hold,” Lee told a news conference.
Two board members voted against the rate increase, underscoring a high level of uncertainty in the economic outlook, Lee said.
However, monetary policy remains accommodative and the economy is expected to continue to grow in line with its potential rate, while inflation is expected to remain in a mid to upper 1 percent range, he said.
The decision came as the nation faces the double challenges of growing household debt and an economic slowdown, as a global trade dispute has sapped demand for made-in-Korea vehicles and high-tech gadgets, raising concerns over the country’s export-reliant economy.
Overseas shipments account for more than half of the country’s economy.
Yesterday’s rate hike could be the last for a long while. Most economists forecast rates to still be at 1.75 percent in the third quarter of next year, given growth and inflation rates. It would ease pressure on the BOK if the US Federal Reserve adopts a less hawkish path.
“The two votes against the decision is a good signal that it will get increasingly tough for the BOK to move rates higher from here, given the slowing economy, weaker inflation and declining household debt growth,” LG Economic Research Institute economist Cho Young-moo said.
The economy is likely to grow 2.5 percent next year, Cho said.
Additional reporting by Bloomberg
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