In a decision that had been widely signaled, the Bank of Korea today raised the benchmark interest rate by a quarter of a percentage point to 1.75% – the first rate hike since November 2017.
The rate rise comes amid local concern about high household debt and runaway real estate prices. While the economy is kept afloat on exports, domestic construction and facility investments are both on a downturn.
Meanwhile household debt continues to rise, hitting US$1.33 trillion by the end of September, buoyed by a decade of low borrowing costs, while real estate prices – a political hot potato for any Seoul administration – have soared.
The BOK said that its Monetary Policy Board had judged that the domestic economy “has generally expanded at a rate on par with its potential growth level,” according to Yonhap News. However, earlier this year, the BOK downgraded its GDP growth forecast for the year to 2.7% from 3.0%
Prior to today’s decision, BOK Governor Lee Ju-yeol had hinted at a rate rise, noting that a decade of low interest rates had generated an imbalance.
However, the central bank also had to content with an issue beyond its own shores: the rate gap between itself and the US Federal Reserve, a gap that has now been narrowed to 0.5%.
At a time when Washington is seeking to re-industrialize by luring capital to, or back to, the US, an interest rate disparity between the two countries could ignite capital flight from the South Korean bourse, where foreign players hold approximately a third of the market.
Last month, the benchmark KOSPI stock index fell 13.37 %, led by foreign sell-offs. Pundits cited concerns over a slowdown in Korea’s largest export market, China, as well as collateral impact of the cross-Pacific trade war underway between Beijing and Washington, as the key initiators of the sell-off, which was led by foreign investors.
The October correction was the worst to hit the market since the global financial crisis of 2008. While other global bourses were also badly affected, the KOSPI figures were among the worst in international markets, as the export-dependent South Korean economy remains extremely sensitive to global trade patterns.