South Korea's central bank hikes interest rates to boost economic stability

Photo : AP

On Friday, South Korea's central bank, the Bank of Korea (BOK), announced a significant monetary policy shift by cutting its key interest rate for the first time in more than four years. The decision to lower the policy rate by a quarter percentage point to 3.25% comes as the bank grapples with a sluggish economy and the pressing need to stimulate growth, which has been hindered by high levels of household debt.

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The last time the BOK made such a move to lower borrowing costs was in May 2020, during the height of the COVID-19 pandemic. Since then, the bank has focused on controlling inflation and managing household debt, both of which surged due to soaring housing prices. In August 2021, the bank raised interest rates by a quarter percentage point, reflecting concerns over inflation and the rising burden of household debt, but subsequently maintained steady rates for over three years.

In its latest statement, the BOK indicated that domestic demand is recovering slowly, impeding economic growth. It pointed out that there is now room for a rate cut, as inflation appears to be stabilizing and the growth of household debt is beginning to slow down. This trend coincides with a cooling housing market in the greater Seoul area, which has been a significant contributor to the rising debt levels.

The central bank also acknowledged the uncertainties facing South Korea’s trade-dependent economy, particularly the escalating crisis in the Middle East, which could potentially impact fuel prices, exchange rates, and public utility costs. The bank emphasized that the future trajectory of economic growth will largely depend on the pace of recovery in domestic demand, the economic conditions in major global markets, and trends in information technology exports.

Furthermore, the BOK forecasts that the growth in house prices in the metropolitan area, as well as household debt levels, are expected to gradually decelerate. This slowdown is attributed to the strengthening of macroprudential policies aimed at ensuring the stability of the financial system.