INSTANT VIEW 3-Bank of Korea lifts rate off record low as demand heats up
SEOUL, Aug 26 (Reuters) – The Bank of Korea raised its policy rate for the first time in almost three years on Thursday, becoming the first major Asian central bank to hike interest rates since the pandemic began to curb surging household debt.
KEY POINTS * Full story * First rate hike since Nov 2018 * Sixteen of 30 analysts saw rate hike; 14 on hold – Reuters poll
MARKET REACTION
* Seoul stock market’s KOSPI falls sharply after the rate decision
* Won pares earlier gains after the release of the policy statement
COMMENTARY
ROB CARNELL, ECONOMIST, ING BANK, SINGAPORE
“I think the trading community were more on board with the hikes than the economists’ forecasts.
“I thought the Bank of Korea (BOK) would be on the brave side to go it alone and hike. A few days ago, we had yet more household debt numbers they’re continuing to rocket higher … so I think they’ve wanted to address that for a while.
“The real question is do they squeeze another one in before the year-end? I think that would be the way I’m leaning now … so long as COVID doesn’t start becoming problematic again.”
ALEX HOLMES, ASIA ECONOMIST, CAPITAL ECONOMICS
“There are good reasons to expect tightening to continue over the coming quarters. Admittedly, the virus remains a headwind to the recovery. But the economy has become resilient to outbreaks and rapid progress on vaccines should help the country move to more light-touch containment measures soon.
“The financial stability issues troubling the BoK continue to build. House prices rose by 14.3% y/y in July, the most since 2002. Recent data show that household debt was up by 10.3% y/y in Q2, after posting its largest ever gain during April-June.
“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.”
WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE
“I don’t think this 25-basis-point hike in the benchmark interest rate could have a significant impact on dampening property prices, but I think it’s somewhat of a signal to the market that they are quite concerned about household credit.
“There is a shortage of housing in South Korea, and interest rates are still very low even if you raised by (another) 75 basis points to bring it to pre-COVID levels, so I don’t think they can use just the interest rate as a tool to contain this.”
TEPPEI INO, SENIOR ANALYST, MUFG BANK, TOKYO
“Given the BOK has already indicated its intention to raise interest rates, it should be no surprise to markets. That said, some people including myself did not expect it to take an action just before Jackson Hole.
“The rate hike is notable in a sense that it is the first in Asia, apart from a move in smaller economies such as Sri Lanka. But on the other hand, it is questionable if other central banks will follow. Perhaps Taiwan’s economy is strong enough. But China appears to have an easy policy bias and Southeast Asian economies are, of course, nowhere near policy tightening.”
TRINH NGUYEN, ECONOMIST, NATIXIS, HONG KONG
“They are sending a message that debt is the bigger concern for them than the Delta impact on the economy, and I think that means that we can look at potentially another 25-basis-point hike. I think November is very likely.
“The message is quite positive, it’s that South Korea now has moved on from trying to recover and being in this emergency mode fighting the virus.
“It’s among the first in the world to start thinking about reining in the excess of the very strong medicine to fight the virus in 2020 … they’re ahead of the game to start thinking about debt and I think that’s something the Fed will have to think about as well.
“I think they have to manage it very gently and see how things go. There’s a lot of uncertainty at the moment. I don’t think its going to be an aggressive rate hike cycle, it’s going to take it to 1% and then see how things go.”
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