The Bank of Korea's Monetary Policy Committee will decide on the benchmark interest rate and future monetary policy direction on the 16th. Market attention is focused on whether rates will rise or remain unchanged. However, the more critical aspect of this meeting is not merely the 0.25 percentage point change in the benchmark rate, but whether it signals that the South Korean economy is entering a tightening phase again.
The market is already reacting. Government bond yields have risen ahead of the benchmark rate, and bank lending rates are also on the rise. Despite the government's repeated regulations, the real estate market continues to see record-high prices, particularly in Seoul, while household debt is increasing rapidly once more. The value of the won is also vulnerable to external factors, indicating that the Bank of Korea's policy options are becoming increasingly limited.
Since the COVID-19 pandemic, our economy has grown accustomed to low interest rates and abundant liquidity. Companies have based their investment plans on low rates, households have increased their assets through borrowing, and the government has supported the economy with expansionary fiscal policies. However, the current economic environment is entirely different. If inflation concerns are not fully resolved and real estate prices are stimulated again, monetary authorities will find it difficult to ignore tightening measures.
Raising interest rates will not solve all problems. In fact, it could increase the burden of financing for businesses and dampen consumer spending. With domestic recovery still insufficient, tightening could heighten the risks to economic growth. Nevertheless, monetary authorities cannot overlook inflation and financial stability. The central bank's primary responsibility is to maintain the value of the currency and the trust in the financial system, rather than merely stimulating the economy in the short term.
The issue is that our society has yet to break free from the mindset of the low-interest era. When real estate prices rise, there is still a tendency to take out loans to buy homes, businesses continue to rely on borrowing for growth, and the government views fiscal expansion as the easiest solution. However, in today's global economy, characterized by high interest rates, high inflation, and geopolitical uncertainties, such approaches are no longer viable.
In particular, government policies must align with monetary policy. If one side is reducing market liquidity through interest rates while the other is implementing excessive fiscal expansion or market-stimulating policies, the effectiveness of these policies will inevitably be diminished. Trust in the market increases when monetary policy, fiscal policy, financial policy, and real estate policy work in harmony.
Businesses must also prepare for change. In the era of low interest rates, aggressive borrowing could be a means of growth, but it is likely that financial soundness will become a key competitive advantage in the future. Households face a similar situation. Debt accumulated during low rates can become a significant burden as rates rise. What is needed now is not additional borrowing, but debt management and risk diversification.
The Bank of Korea's upcoming decision will not just be a simple interest rate adjustment; it will send an important message to our economy. Even if rates are held steady this time, it should not be interpreted as the end of the tightening trend. The market has already begun to reflect a new environment, and economic actors must develop strategies accordingly.
Tightening is not a policy aimed at stifling growth. It is a process to normalize an economy that has relied on excessive liquidity and debt, preparing for sustainable growth. Now, the crucial factor is not the decision of the Monetary Policy Committee itself, but how quickly we all adapt to the new economic order. The era of tightening is already at our doorstep. Only those who prepare can turn this change into an opportunity.
* This article has been translated by AI.
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