South Korea’s central bank raised the key rate Thursday, as widely expected, in a bid to rein in rising inflation and snowballing household debt that could derail the economic recovery from the pandemic, but the road ahead appears bumpy.
The monetary policy board of the Bank of Korea voted to increase the benchmark seven-day repo rate by 0.25 percentage point to 1 percent, ending a 20-month period in which rates were held below 1 percent to support the pandemic-battered economy. The move came after the central bank raised the rate from an all-time low of 0.5 percent to 0.75 percent in August this year.
The latest rate hike had been hinted at by the central bank on several occasions, as worries mounted about fast-growing household debt spurred by low borrowing costs during the pandemic, as well as accelerating consumer prices.
But it is not clear whether the current pace of the BOK’s rate hikes will continue as planned, considering a host of volatile factors such as the resurgence of COVID-19 infections and the nearsighted policy promises from presidential hopefuls that could send misleading signals to the market.
Consumer prices rose 3.2 percent in October from a year earlier, marking the fastest clip since 2012. On Thursday, the Bank of Korea raised the forecast for 2021 consumer prices to 2.3 percent, up from a previous estimate of 2.1 percent. Amid the global supply chain disruptions and rising energy costs, prices for a wide range of products are shooting up.
The fast-paced and continual rise in consumer prices, coupled with stagnant income, could deal a blow to the economy in a way that undercuts the purchasing power of Korean households.
But the headline numbers may understate the true rate of inflation, since the BOK data does not include housing costs. Those surged during the pandemic, as speculative real estate investments on the back of record-low interest rates proliferated despite the repeated -- and largely futile -- introduction of government policies to battle property speculation.
BOK board members earlier pointed out that the inclusion of housing costs would show that Korean inflation is higher than the usual figures suggest, a view that calls for more aggressive steps. The country’s housing prices in the first nine months of this year spiked nearly 12 percent, the largest surge in 15 years.
The government tried hard to tighten lending rules to tame household debt, but the data released Tuesday shows that household credit reached a record high of 1,844.9 trillion won ($1.58 trillion) as of end-September, up 36.7 trillion won from three months earlier. The growth pace slowed a bit, but a closer look at the details reveals that mortgage loans climbed by 20.8 trillion won to 969 trillion won in the third quarter -- the biggest increase since the fourth quarter of 2016 and a reflection of explosive demand for houses.
Although the central bank kept its 2021 growth outlook unchanged at 4 percent and forecast a 3 percent increase next year, Asia’s fourth-largest economy has to navigate a thorny web of challenges to shore up its economy.
The global chip shortage shows no signs of abating, hurting various industries including electronics and car manufacturers, while concerns linger about the negative impact of a rate hike on the household debt burden. An increase of a quarter percentage point in the key rate is estimated to bring an additional 2.9 trillion won in household interest payments per year, according to the Bank of Korea.
In setting the pace of its rate hikes, the central bank has to watch how the country handles the resurgence of the coronavirus. Since the country introduced its “living with COVID-19” policy early this month, new cases are climbing to a worrying level. After hitting an all-time high of 4,115 on Wednesday, the figure reached 3,938 Thursday, raising questions about whether the government loosened its social distancing rules too much, too fast.
At this critical juncture, presidential hopefuls are urged to refrain from half-baked, unrealistic campaign pledges that could mislead the people and the market. Even without such distractions, the country’s economy is already confronting too many challenges.
By Korea Herald (email@example.com