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South Korea to kick-start Asia’s monetary tightening

The Bank of Korea (BOK) cut the policy rate by 75 basis points last year to a record low 0.5 per cent to support the economy
A student looks at oversized Korean won bank notes inside the Bank of Korea in Seoul, in this file photo. — Reuters
A student looks at oversized Korean won bank notes inside the Bank of Korea in Seoul, in this file photo. — Reuters

SEOUL: South Korea is set to be the first Asian economy to raise interest rates from pandemic-era lows as its hawkish, outgoing central bank governor steps up efforts to stamp out any incipient property bubbles or household debt stress.


Bank of Korea Governor Lee Ju-yeol surprised financial markets last week, when policy rates were kept at record lows but he signalled they could rise as early as August, at the next policy review.


Even though Asia’s fourth-largest economy has recovered rapidly and inflation is running above target, it is battling record Covid-19 cases as the more infectious Delta variant spreads, triggering strict measures and a semi-lockdown in the Seoul area.


“It’s one of those rare times where taming home prices has become more important, both politically and on economic fronts,” said Yoon Yeo-sam, an analyst at Meritz Securities.


“Nothing the government did for the past few years could stop home price surge, and time is running out both for Lee and the government.” Lee’s term as governor ends in March 2022, just weeks before President Moon Jae-in also steps down. During his eight years at the helm, the hawkish-leaning Lee has struggled to contain debt levels in a country with a proclivity for risk-taking.


The Bank of Korea (BOK) cut the policy rate by 75 basis points last year to a record low 0.5 per cent to support the economy.


Those low interest rates spurred heavy borrowing by households. Household debt was up to 1,765 trillion won ($1.55 trillion) in March, of which mortgages comprised 931 trillion won.


The cheap cash has further fuelled speculation in property, stock and cryptocurrency markets. House prices have soared despite a slew of measures such as taxes and lending restrictions, prompting the BOK to warn in June that financial vulnerability of local asset and credit markets was at its highest since the global financial crisis of 2008.


Analysts now reckon interest rates are too low for an economy projected to grow 4 per cent this year, its fastest since 2010. Inflation too is running well above the central bank’s 2 per cent target.


“Lee clearly has his retirement timetable in mind. He doesn’t have much time left to really do what he wants, which is to bring debt growth and home prices down, that’s the legacy he wants to go home with,” said Kong Dong-rak, an economist at Daishin Securities.


“The longer he waits, the harder it would be for him to go ahead with tightening,” he said. — Reuters


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