The Bank of Korea will announce its interest rate resolution on Thursday. The market generally expects the South Korean central bank to maintain its benchmark interest rate at 3.5% to curb the rebound in household debt while maintaining economic growth momentum. This will be the sixth consecutive suspension of interest rate hikes since January.
At the time of this meeting, the Middle East crisis may push up oil prices and exacerbate global inflationary pressures. In South Korea, as housing prices rebound and private loans increase again, policymakers are concerned that high household debt levels are the main long-term risk to economic growth.
According to data from the Bank of Korea, as of the end of September, South Korean household debt reached a record high of 1079.8 trillion won ($798 billion), with the largest increase in mortgage loans since February 2020. Bank of Korea Governor Lee Chang yong urged potential homebuyers to be aware that high interest rates may last longer than expected.
Due to borrowers' expectation that the Bank of Korea will not raise interest rates, South Korea's mortgage loans have risen again
In the case of continuous consumer inflation pressure, the officials of the Bank of Korea unanimously believe that it is necessary to curb the asset foam and avoid financial imbalances. For several months, South Korean central bank officials have warned that they are prepared to raise interest rates by another 25 basis points if deemed necessary.
The market is increasingly skeptical whether this will become a reality. Further interest rate hikes will bring greater pressure to the credit market, which is still recovering from a series of crises. At the same time, as exports have not yet resumed growth, industrial output remains unstable, and the prospects for economic growth remain uncertain.
Kathleen Oh, an economist at Bank of America, said: "So far, no one has voted in favor of raising interest rates, which makes us skeptical of the strong consensus and willingness to take action. With growth momentum weakening, we believe that the macro environment is now even less suitable for further interest rate hikes
The public is also increasingly uneasy about the increasing interest rate burden on households and businesses. At a cabinet meeting last week, South Korean President Yoon Seok hyuk mentioned the "interest burden" when discussing the global financial market turmoil and its potential impact on South Korean interest rates after the Hamas attack on Israel.
Yin Xiyue said, "High inflation and an increase in interest burden will lead to a decrease in people's actual income and have a negative impact on the momentum of economic recovery
So far, the impact of the Middle East conflict on oil prices remains limited. But Li Changyong stated last week that if the conflict escalates and oil prices break through the range of around $85 per barrel, it will prompt the bank to readjust its growth expectations for next year.
The Bank of Korea predicts that South Korea's economic growth rate will accelerate to 2.2% in 2024, while this year's growth forecast is 1.4%. Lee Chang yong stated that the growth prospects are increasingly becoming a focus of attention for the South Korean central bank, although he has clearly stated that the main policy goal is still to combat inflation. Before rebounding in August and September, price growth briefly cooled to a target level of 2% in early summer.
The Bank of Korea began its tightening cycle in August 2021, earlier than peers such as the Federal Reserve in the fight against inflation. Some economists suggest that the South Korean central bank may eventually lead the Federal Reserve again - in the opposite direction, lowering interest rates as financial and economic concerns continue to intensify.
Long term high interest rates may increase financial pressure, making it difficult for businesses and households to sustain their economic activities, "said Jeong Woo Park, a South Korean economist at Nomura Holdings