South Korea’s central bank on Friday raised the benchmark interest rate for the first time in 12 months as the bank was pressured to hike borrowing costs amid the massive household debts.
Bank of Korea (BOK) Governor Lee Ju-yeol and six other monetary policy board members decided to lift the seven-day repurchase rate by a quarter percentage point to 1.75 percent.
It marked the first rate increase since the BOK hiked its target rate to 1.50 percent in November last year from an all-time low of 1.25 percent.
The rate hike was in line with market expectations. According to the Korea Financial Investment Association survey of 200 fixed-income experts, 79 percent predicted a rate increase.
Pressures had mounted on the BOK to tighten its monetary policy stance further amid the fast-growing household debts that topped 1,500 trillion won (1.34 trillion US dollars).
Household debts grew at a faster pace than household income, pulling up housing prices as households rushed to purchase new home with borrowed money amid the prolonged low-rate trend.
The widening gap in policy rates between South Korea and the United States also encouraged the BOK to lift rates.
The US Federal Reserve hiked its benchmark rate by a quarter percentage point to a range of 2.00-2.25 percent in September, the third rate increase in 2018. The Fed was widely forecast to tighten its policy stance further later this year.
If the BOK belatedly responds to the widening gap in its target rate with the US counterpart, it may stoke a sudden foreign capital exodus from the South Korean financial market.
Lee, the BOK governor, told a press conference that despite the rate hike, the BOK’s monetary policy stance remained „accommodative,“ indicating a future rate increase.
However, the BOK’s next rate hike could come later than expected given the worsening of recent economic indicators.
Two of the seven monetary policy board members opposed the rate hike, claiming a rate freeze.
The central bank revised down its 2018 growth outlook for the economy to 2.7 percent in October from 2.9 percent estimated three months earlier.
The year-over-year employment growth stayed below 100,000 for eight months through September. The number of those unemployed topped 1 million for the ninth consecutive month.
The daily average export in October reduced 4 percent from a year earlier. Private consumption in September shed 2.2 percent compared with the previous month.
The finance ministry said in its monthly economic assessment report that negative risk factors lingered such as trade conflicts, the expected rate hike in the United States, the expensive crude oil and a rising volatility in the global financial market.