The Bank of Korea raised its benchmark interest rate, for the first time since June 2011, from 1.25% to 1.5% on November 30.
“The South Korean economy is currently showing a solid growth close to its potential economic growth rate and the inflation rate is expected to approach our target inflation rate,” said Bank Of Korea Governor Lee Ju-yeol, adding, “The degree of monetary easing, which has been increased in response to low prices and a slow growth, needs to be adjusted.”
The interest rate adjustment is based on a determination that the South Korean economy’s solid recovery is likely to continue for a while. This year, the GDP of South Korea is likely to grow at least 3% based on a recovery in exports and investment. “The growth of the local economy for next year is estimated at approximately 3% as well in view of various factors like North Korea risks and exports,” the governor remarked.
The interest rate adjustment is also to respond in advance to an interest rate hike by the Fed, which already raised its benchmark rate four times this year and is likely to raise it again in December this year. Earlier, the benchmark rates of South Korea and the United States had the same ceiling and an interest rate hike in the U.S. was predicted to result in a capital outflow to the U.S.
The adjustment is to stabilize housing prices and curb an increase in household liabilities, which already exceeded 1,400 trillion won, too. A large amount of money has flowed into the real estate market with low interest rates continuing. The monetary authorities determined that a higher interest rate is required to suppress an increase in housing loans and reduce asset bubbles.