Bank of Korea Leads the Way in Asia With Interest-Rate Hike

Updated on
  • Other central banks in the region may be set to follow suit
  • One board member dissented with call to keep policy on hold
Bloomberg’s Stephen Engle reports on the Bank of Korea policy decision.

The Bank of Korea raised its benchmark interest rate for the first time since 2011, marking a likely turning point for Asian central banks.

The region faces rising pressure to increase borrowing costs after the Federal Reserve began tightening at the end of 2015 and today’s move in Seoul is the first hike of a benchmark rate by a major central bank in Asia since 2014. 

Governor Lee Ju-yeol said during a news conference that the decision to raise the seven-day repurchase rate to 1.5 percent was meant to prevent financial imbalances. One board member dissented, voting to hold the benchmark steady, Lee said.

Strong exports that have fueled profits at key manufacturers such as Samsung Electronics Co. are helping the economy toward projected growth of more than 3 percent this year. With this, and inflation near the central bank’s 2 percent target, room has opened for the central bank to begin normalizing policy.

Click here to read more on the global trade that’s boosting Korea.

With another rate increase by the Federal Reserve seen coming in December, the BOK would also want to avoid having higher U.S. rates triggering capital outflows from Korea.

While the Lee and his board are wary of increasing repayment burdens for borrowers given the nation’s record level of household debt, the hike underscores their confidence in the economic recovery and inflation.

The move was forecast by 18 of 24 analysts surveyed by Bloomberg, with the rest expecting the central bank would leave the rate at a record-low 1.25 percent, where it had been since June 2016.

Lee said the economy would continue to grow steadily at around the potential rate, with an expansion of around 3 percent expected in 2018. Inflationary pressures will increase as the economy continues recovering, with price gains gradually approaching the target, he said.

South Korea’s economic recovery has been driven by exports, especially of semiconductors, while domestic consumption remains modest. Lee said he expected the semiconductor growth cycle to continue for now.

Market Reaction

The won weakened 0.9 percent against the dollar to 1,086.90 on Thursday as of 1:25 p.m. in Seoul. The yield on three-year government bonds fell one basis point to 2.1 percent.

Economists expect the BOK’s rate-hike cycle to be shorter and more gradual than previous ones, ending at about 2 percent, according to a survey by Bloomberg.

The central bank said in a statement that it would maintain its accommodative policy stance, aiming at ensuring that inflation stabilizes at the 2 percent target over the medium term. Inflation expected to be in the mid-1 percent range for some time, it said.

Lee Ju-yeol on Nov. 30, 2017.

Photographer: SeongJoon Cho/Bloomberg

Lee told reporters after the press conference that the rate hike doesn’t constitute tightening, stressing the need to reduce policy accommodation.

The International Monetary Fund said earlier in November that the BOK’s policy would remain accommodative even after two rate increases. 

Expectations of a rate hike had been high since the board’s meeting in October, when one dissenter called for an increase.

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