the Bank of Korea's monetary policy committee held a meeting on the 16th and raised the base rate by 0.25 percentage point to 2.75% from 2.5% annually. The decision was made unanimously by the board members. Bank of Korea (BOK)'s rate hike is the first in 3 years and 6 months since Jan. 2023 (3.25%→3.5%). The reason is that, due to the impact of the Middle East war, the consumer price inflation rate exceeded 3% in May–June, far above BOK's inflation target of 2%. Recently, the won-dollar exchange rate has also remained high in the upper-1,400-won range.
Earlier, a survey by ChosunBiz of domestic securities firms' macro and bond experts found that all 10 predicted the BOK Monetary Policy Board would raise the base rate by 0.25 percentage point to 2.75% from 2.5% annually at this meeting. All also predicted the rate would rise to 3% by year-end. They saw a high likelihood that the rate would be raised by an additional 0.25 percentage point at the remaining Monetary Policy Board meetings this year (Aug., Oct., Nov.).
◇ Bank of Korea (BOK) "concern about inflation amid expanding growth" leaves door open to additional hikes
Bank of Korea (BOK) said in the monetary policy stance it released after the rate hike, "With growth strengthening mainly in exports and investment, the inflation rate is expected to stay above the target level for a considerable period, and risks from the financial stability side are also continuing, so we judged it appropriate to raise the base rate by 0.25 percentage point."
Bank of Korea (BOK) said, "This year, the core inflation rate (excluding food and energy prices) will be somewhat higher than the 2.4% projected in May." It also left open the possibility of additional rate hikes. Bank of Korea (BOK) said, "It is judged necessary to continue the tightening path going forward." It added, "The timing and pace of additional (rate) hikes will be decided while assessing the degree of inflationary pressure, the pace of economic improvement, and financial stability conditions."
This rate hike also aims to stabilize the exchange rate lower. The won-dollar rate has been rising since the second half of last year, topping 1,500 won in May–June, and although it has been trading in the upper-1,400-won range this month, it is hard to say the upward trend has stopped. One of the causes of this exchange rate rise has been pointed to as the interest rate gap between Korea and the United States. Korea's rate is 1.25 percentage points lower than the U.S. Federal Reserve (Fed) policy rate. As a result, investment funds are said to be flowing out of Korea to the United States. With this rate hike, the Korea-U.S. rate gap has narrowed to 1 percentage point.
Recently, macroeconomic indicators have been improving, leading to analysis that even if the BOK raises rates, the burden on corporations will not be large. Thanks to strong exports including semiconductors, real gross domestic product (GDP) in the first quarter grew 1.7% from the previous quarter. It was the biggest increase in 5 years and 6 months since the third quarter of 2020 (2.2%). The Ministry of Economy and Finance, in its economic growth strategy for the second half released on the 14th, raised this year's real GDP growth forecast to 3% from 2%.
Meanwhile, the rate hike is expected to increase the interest burden on people with home loans. According to analysis submitted by Bank of Korea (BOK) to Lee Jong-uk of the People Power Party, if the mortgage loan rate rises by 0.25 percentage point, the total interest burden on all borrowers increases by 1.8 trillion won per year. The per-capita interest burden rises by 296,000 won, from an average of 5,843,000 won to 6,139,000 won.