South Korea becomes the first Asian economy to raise interest rates


Korea Economic Update

Since the beginning of the coronavirus pandemic, South Korea has become the first Asian economy to raise interest rates, as record household debt and soaring real estate prices overwhelmed concerns about Seoul’s efforts to control the virus delta variant.

In the closely watched decision on Thursday, the Bank of Korea raised its benchmark interest rate to 0.75% and the 7-day repo rate by 25 basis points from its historical low of 0.50%.

South Korea is On Tracks This year’s GDP has increased by 4%. The export-oriented economy has benefited from strong demand for electronic products including computer chips and smartphones, as well as the recovery of the Korean-made ship and automobile markets.

But Seoul’s economic planners are increasingly worried that long-term problems in the domestic economy have been Booming export recovery, Which helps save the country from the recession caused by the pandemic last year.

“The financial stability issues that plague the Bank of Japan continue to intensify,” Capital Investment macro economist Alex Holmes said.

“House prices rose by 14.3% year-on-year in July, the largest increase since 2002. Recent data shows that household debt rose by 10.3% year-on-year [the second quarter], The biggest increase in history was set between April and June. “

“As the policy interest rate is still very low after the interest rate hike today, the Bank of Korea may want to tighten further to curb financial risks according to past standards,” Holmes added.

There are also signs that many self-employed individuals in Asia’s fourth-largest economy account for nearly one-third of the workforce. Due to the restrictions of the coronavirus, their incomes have fallen sharply, and they are facing increasing financial pressures.

Economists warned that although the government Stimulus, Which includes cash payments, the recovery of consumer spending remains fragile.

According to polls conducted by Bloomberg and Reuters, despite the central bank’s signal to resume interest rate hikes, economists had wide-ranging disagreements on the Bank of Korea’s actions before making a decision.

Uncertainty stems from months of Coronavirus is making a comeback This has forced South Korea to implement the strictest social distancing controls since the pandemic began.

Questions about the Central Bank of New Zealand last week Delay After the Covid outbreak triggered a nationwide lockdown, it plans to raise interest rates.

After the central bank took action, the Korean won against the U.S. dollar fell 0.2% to 1,168 won.

Supplementary report by Hudson Lockett in Hong Kong

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