South Korea has become the first major Asian economy to raise interest rates since the Covid pandemic started. South Korea’s central bank raised interest rates on Thursday in a decision that was expected as financial risks heat up notwithstanding the virus threat.
The Bank of Korea raised its policy rate by 25 basis points to 0.75% for the first time for almost three years, becoming the first created economy to raise interest rates during the pandemic time.
Bank of Korea Governor Lee Ju-yeol said the decision to hike rates was not consistent, and a contradicting board member was calling for rates to be held consistently. It was additionally split between experts polled by Reuters, with just 16 out of 30 expecting the rate hike on Thursday.
The Bank of Korea expanded its base rate of interest from a record low of 0.5% to 0.75%.
One examiner, Alvin Tan, head of Asia FX strategy at RBC Capital Markets, called it a “grudging rate hike,” even though the market was “fully expecting a string of rate hikes.”
South Korea’s benchmark index Kospi fell 0.18% after the declaration. The Korean won weakened.
Most central banks universally have cut rates to record lows in a bid to set up their pandemic-hit economies. From the U.S. to Europe and Asia, governments throughout the world have been carrying out stimulus measures to support businesses.
“Admittedly, the virus remains a headwind to the recovery,” Capital Economics said in a note following the declaration.
South Korea has been grappling with high numbers of Covid cases in recent weeks, with its moving 7-day average daily cases surging past 1,800 — contrasted with a little more than 400 in June, as per our World in Data.
Last week, the nation expanded its social distancing curbs for an additional two weeks as Covid cases surged, as per Reuters.
“But the economy has become increasingly resilient to outbreaks and rapid progress on vaccines should help the country move to more light-touch containment measures soon,” Capital Economics said.
The research firm highlighted financial risks pressuring the economy, like heating house costs, which rose by 14.3% year-on-year in July. Household debt likewise shot up, by 10% year-on-year in the second quarter.
James Lee, chief economist of Japan and Korea at HSBC, said he wouldn’t preclude further tightening.
“Financial stability risks — household debt rising, housing prices, have been an issue not only this year, not only last year but at least for the past five years. So when given the chance … the Bank of Korea will continue to normalize policy rate,” he told CNBC’s “Squawk Box Asia” on Thursday.
The central bank will “keep the door open for further policy action,” he added. “But whether they actually can hike or not will heavily depend on the growth outlook going forward,” Lee said.
The move is pointed toward aiding control of the country’s household debt and home costs, which took off in recent months.
Central banks throughout the world are attempting to balance the effect of ongoing Covid-19 diseases against economic risks such as high inflation.
It is the first time the Bank of Korea has raised its main interest rate for very nearly three years.
The decision comes as the central bank attempts to balance assisting with supporting the country’s economic recuperation against the risks of surging debt and rising inflation.
Policy producers for Asia’s fourth-biggest economy had been signalling that they were prepared to expand the cost of borrowing since May.
The move was deferred as the most recent Covid-19 flare-up set the country into a partial lockdown last month.
Central banks throughout the world are planning to begin destroying their pandemic-era policies that have seen crisis upgrade measures got as economies were closed down to slow the spread of Covid-19.
Most nations that have raised the cost of borrowing so far this year have been in arising economies that have seen inflation speed up as demand for goods and services recuperated.
In Asia, Sri Lanka last week became the first country in the region to raise interest rates.
Likewise in the Asia-Pacific region last week, New Zealand was relied upon to become the first advanced economy to build rates in the wake of the Covid emergency.
In any case, the day before the monetary policy decision was declared Prime Minister Jacinda Ardern imposed a nationwide lockdown.
The Reserve Bank of New Zealand kept its rate at a record low of 0.25%, saying in a proclamation “the decision was made in the context of the Government’s imposition of Level 4 COVID restrictions on activity across New Zealand”.