In what has been heralded as a pivotal shift for central banks throughout Asia, the Bank of Korea (BOK) has increased its benchmark interest rate for the first time since 2011. The November 30 hike, from 1.2 to 1.5 percent, marked the first such move among the region’s major economies since 2014.
The precedent has been a long time coming; since the Federal Reserve first started tightening interest rates at the end of 2015, the region has faced mounting pressure to raise the cost of borrowing.
But despite concerns regarding repayment burdens – particularly as South Korea’s household debt is at its highest level on record – the move is a sign of confidence in the economy’s ongoing recovery.
Despite concerns regarding repayment burdens, the interest rate hike is a sign of confidence in the economy’s ongoing recovery
Overall, 2017 was a significant year for Asia’s fourth-largest economy. Year-on-year expansion in export revenue was an impressive 10 percent in November, as profits rose for key manufacturers, including Samsung. The global demand for semiconductors, chips, steel and petrochemical products continued to climb, prompting real annual growth in South Korea’s GDP to reach 3.6 percent in Q3 2017.
With a projected growth rate of three percent in 2018, combined with a closing in of the two percent inflation target, we are now seeing the BOK starting to normalise monetary policy. That said, Governor Lee Ju-yeol did not give any overt allusions to further hikes during a news conference, although another is expected in the latter part of 2018 as the bank attempts to curb spiralling household debt.
The BOK is in no position to begin an aggressive interest rate programme, due to the strength of the South Korean won: this rose by more than 11 percent against the US dollar in 2017, thereby applying pressure to inflation. Though other economies in the region are not expected to immediately follow suit, a cycle of gradual tightening in Asia is likely to take place in 2018. As debt levels continue to grow in the region, policymakers are keen to increase interest rates off the back of faster economic growth. As is the case with South Korea, each hike will require an adjustment period, meaning a slow approach from all in the region, taking heed from the bold moves of the BOK.