The Bank of Korea has resumed its interest rate hike cycle for the first time in three and a half years, drawing attention to the magnitude and pace of potential further increases. Unlike previous periods of consecutive hikes, this time, strong exports, particularly in semiconductors, and a recovering domestic economy suggest a gradual approach to raising rates while monitoring economic and financial stability.
On August 18, the Bank reported that the base rate was raised by 0.25 percentage points from 2.50% to 2.75%. This marked the first rate increase since January 2023. The Monetary Policy Committee indicated the need to maintain a 'hiking trend.' Recently, Deputy Governor Yoo Sang-dae stated, "We have entered a new interest rate hike cycle," leaving the door open for additional increases.
The key question is whether this hike cycle will lead to back-to-back increases like in the past. The Bank has previously raised rates consecutively, including two hikes in July and August 2007 and three hikes from November 2021 to January 2022. Following that, rates were rapidly increased from April 2022 to January 2023. Many view the increases since November 2021 as a continuation of the tightening cycle that began after the COVID-19 pandemic.
However, the circumstances necessitating rate hikes now differ from those in the past. Previously, the need to address financial and price imbalances was urgent due to soaring housing prices, rising household debt, and inflation driven by low interest rates and increased liquidity. In particular, from 2021 to 2023, inflationary pressures intensified due to the liquidity released after the pandemic, supply chain disruptions, and rising raw material costs.
In contrast, while growth supports the current rate hike, the urgency surrounding inflation and financial stability is considered relatively lower than before. Exports, particularly in semiconductors, are showing solid performance, and there are signs of recovery in domestic consumption. Although there is room to raise rates amid ongoing economic recovery, the situation is not as pressing as it was previously, where immediate tightening was necessary to control inflation and household debt.
As a result, the market anticipates that the Bank will likely assess the economic situation after the initial hike before deciding on further increases. October is being discussed as the next potential adjustment period. Rather than implementing an additional hike in August, the Bank may observe the financial stability indicators, including inflation, household loans, housing prices, and exchange rates, before considering a hike in October.
However, the extent to which the rate hike cycle will continue remains uncertain. Market forecasts suggest that the base rate could rise to 3.00% by the end of this year. If economic, inflation, and financial stability conditions continue to warrant rate increases, additional hikes could extend into the first half of next year, with the final rate potentially reaching between 3.25% and 3.50%.
Yu Jin Investment & Securities has predicted that the base rate will remain unchanged in August. Researcher Kim Ji-na noted that while the rationale for rate hikes exists due to growth, inflation, and financial stability, "the situation has not deteriorated to the point where consecutive hikes are necessary." She pointed out that July's inflation showed a slight downward trend, and the won-dollar exchange rate has decreased to around 1,410 won, indicating that there is no need to rush into a rate hike in August.
Kim added, "By observing the effects of the July hike and maintaining a hawkish communication stance, we can achieve a certain level of tightening effect. Therefore, unless we are in a crisis situation, consecutive hikes may be less effective. We expect an August hold and a strengthening of hawkish guidance."
* This article has been translated by AI.
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