After Korea’s central bank delivered yet another rate hike, market participants have begun to anticipate the end of the monetary tightening cycle is near.
Seeking to fight inflation, the Bank of Korea continued a streak of seven consecutive rate hikes, jacking up the key rate by another 25 basis points on Friday.
With the latest hike, the base rate has reached 3.5 percent, the highest figure in more than 14 years, since the rate stood at 4 percent in November 2008.
The rate hike will lead to an increase of burden for debtors and slowdown in consumption, possibly heightening the risk of a recession.
The market, however, remains hopeful that the central bank’s 18 months of aggressive monetary policy has nearly come to an end, as it said it will take some time to see how the latest action will affect the economy.
Snowballing interest rates for debtors
Rising rates increase the burden for household and business borrowers in the country, as it has seen a rapid rise in household debt since the pandemic.
According to data from the central bank for the third quarter last year, an increase of 0.25 percentage point in the benchmark rate leads to an average increase of 164,000 won ($132) in yearly interest per debtor, meaning that interest will increase by a total of 3.3 trillion won for some 20 million household debtors.
Korea’s borrowing rate has surpassed 8 percent for the first time since the financial crisis in 2008. As of Jan. 6, four major banks' variable rates for housing debt were between 5.08 percent and 8.11 percent. With the latest rate hike, the figure could reach a new high.
However, financial regulators have warned banks to lower their interest rates for economic stability.
Eyes on next rate meeting in February
With the BOK going for a second quarter-point base rate increase, eyes are on the central bank’s next step in February.
The bank will hold its next rate-setting meeting on Feb. 23, following the US Federal Reserve’s Federal Open Market Committee meeting Jan. 31-Feb. 1.
Market observers shared the view that Friday’s rate increase could possibly be the end of consecutive rate hikes.
“The BOK stressed the recession risk and acknowledged a peak out of high inflation, seeing the previous rate hikes to be effective,” said Kang Seung-won, an analyst at NH Investment & Securities. Kang went further to project that a rate fall could happen in the fourth quarter of this year.
KB Securities changed its projection for the base rate in February, lowering the projected figure from 3.75 percent to 3.5 percent, betting on a rate freeze for next month.
“The Monetary Policy Decision statement showed the BOK will watch for the ripple effect of the rate hike,” said Lim Jae-kyun, an analyst from KB Securities. “As the BOK expects the inflation rate to fall down to 3 percent by the end of this year, it will take some time for the central bank to evaluate how its policy affects the market.”
Still, it may be too early to anticipate a turnaround of the BOK’s monetary policy stance, hence a rate freeze or a fall, some say, especially with the US Fed likely to go for another rate hike.
“We have to look at price indexes from the fourth quarter last year that are yet to be released to determine the BOK’s future stance,” said Sung Tae-yoon, an economics professor at Yonsei University.
“The good news is that inflation has passed its peak. Yet, the inflation rate still remains fairly high. Oil prices could rise back soon, leading to high inflation again,” Sung said. “The US Fed is likely to go for a rate hike again and this could pressure the BOK to execute a rate hike next month.”