South Korea has become the first major Asian economy to raise interest rates since the start of the pandemic as record household debt and rocketing property prices outweighed fears over Seoul’s struggles to contain transmission of the Delta variant.
In a closely watched decision in Seoul on Thursday the Bank of Korea raised its benchmark rate to 0.75 per cent, moving its seven-day repurchase rate 25 basis points from a record low of 0.5 per cent.
South Korea is on track for gross domestic product growth of 4 per cent this year with the export-led economy benefiting from robust demand for key electronics products including computer chips, smartphones and displays, as well as recovering demand for Korean-made ships and cars.
But economic planners in Seoul have become increasingly concerned that the booming export recovery from the depths of the pandemic last year has masked chronic problems in the domestic economy.
“The financial stability issues troubling the BoK continue to build. House prices rose by 14.3 per cent year-on-year in July, the most since 2002. Recent data show that household debt was up by 10.3 per cent year-on-year in Q2, after posting its largest ever gain in the April to June period,” said Alex Holmes, an economist with Capital Economics.
“With the policy rate still very low by past standards after today’s hike, the BoK will likely want to tighten further to clamp down on financial risks,” he added.
There are also signs that many self-employed workers in Asia’s fourth-largest economy, who make up nearly a third of the labour force, are under mounting financial pressure after their incomes were reduced sharply due to coronavirus restrictions.
Economists have also warned that despite record government stimulus measures, which have included cash payments, the recovery in consumer spending remains fragile.
Ahead of the decision, economists were broadly split on the BoK’s next move, despite the bank’s earlier signals to resume rate hikes, according to Bloomberg and Reuters polls.
The uncertainty stemmed from a months-long resurgence of coronavirus transmission, which has forced South Korea into its toughest social distancing controls since the start of the pandemic.
Doubts were further fanned after New Zealand’s central bank last week delayed its planned interest rate rise after a Covid-19 outbreak sparked a nationwide lockdown.