**Bank of Korea Decides to Freeze Base Interest Rate Amid Uncertainty**
*By Reporter Yoo Seon-il*
*Published on Money Today Sejong at 2023.10.21 05:40*
[Seoul=Newswire] – The Monetary Policy Committee of the Bank of Korea announced its decision to maintain the base interest rate at 3.5% annually. This marks the sixth consecutive freeze in interest rates. At the committee meeting held on the 19th, all members unanimously agreed on this decision in light of the increased uncertainty surrounding the economy, prices, and household debt caused by the unexpected repercussions of the Middle East conflict. The committee acknowledged the need to “monitor the situation and act accordingly.” Disagreements emerged when discussing the outlook for the next three months, with five members expressing the possibility of additional interest rate hikes while one member suggested remaining open to the possibility of both raising and lowering rates. This stands in contrast to the previous stance of the Bank of Korea, which regularly warned about the implementation of additional austerity measures. Concerns among committee members, especially those of Governor Lee Chang-yong, deepened further.
*Middle East Conflict’s Impact on Base Interest Rate*
Since the last meeting of the Monetary Policy Committee in August, the conflict between Palestinian political faction Hamas and Israel has become the major variable. Speculation has arisen that if the conflict, which began with a Hamas attack earlier this month, escalates into a war in the Middle East, it could have significant implications for the global economy. Discussions on this matter took place at the recent general meetings of the International Monetary Fund (IMF) and the World Bank (WB), as well as at the gathering of finance ministers and central bank governors from the G20 countries in Marrakech, Morocco.
The possibility of accelerated global inflation, including a surge in international oil prices, due to this event has been widely discussed. Although the Bank of Korea acknowledges the difficulty in predicting the precise impact, it does not deny the potential for rising prices. Consequently, the Middle East conflict could play a role in maintaining or raising the base interest rate to manage inflationary pressures.
During the post-committee press conference, Governor Lee highlighted the increased likelihood of consumer price inflation this year and next, driven by the ripple effects of higher international oil prices, as well as events surrounding the Israeli and Hamas exchange rates.
Conversely, it is essential to acknowledge the possibility that the Middle East conflict might necessitate a monetary policy easing. If the global economy stagnates due to the escalation of war in the region, and if Korea’s growth is affected, there may be mounting pressure to lower interest rates. Bloomberg recently suggested that in a worst-case scenario where the conflict escalates, global growth next year could drop by 1 percentage point to 1.7%.
While the Bank of Korea recognizes the gradual improvement in the country’s economy, uncertainties persist. Governor Lee stated that increased geopolitical risks and the prolonged monetary tightening policy in major countries have raised uncertainties about the future growth trajectory.
*Concerns Regarding Household Debt*
Another crucial factor that the Bank of Korea closely monitors is household debt. In recent messages to the market, the bank expressed concerns about the rising levels of household debt. The Bank of Korea’s determination to maintain or raise the base interest rate is motivated by the impact of increasing household debt. According to the bank’s Financial Stability Report released last month, the ratio of household credit to nominal GDP in the second quarter of this year rose to 101.7% from the previous quarter’s 101.5%. This marks the first increase in four quarters. The report warned that the recent rebound in house prices and the surge in household loans could further amplify the household debt-to-GDP ratio.
Governor Lee emphasized in the press conference that a significant number of Monetary Policy Committee members believe it is not desirable for household debt to continue rising. Therefore, gradual reductions in the household debt-to-GDP ratio are required. Furthermore, Governor Lee stated that monetary policy will not contribute to further increases in real estate prices.
Governor Lee’s cautionary remarks about interest rates in the 1% range were also noteworthy. He warned against assuming a reduction in the base interest rate given the expectation that it would revert to this level and that it would consequently alleviate financial burdens. The ambiguity lies in whether these comments imply an extension of the current interest rate level or the possibility of a future increase.
Governor Lee is also concerned about the divergence of opinions between financial authorities. While some advocate for relaxing lending regulations, others emphasize the importance of debt reduction, highlighting a policy inconsistency. Governor Lee expressed frustration over the perception of discord between financial authorities and the Bank of Korea regarding these matters.
Moreover, it is worth noting that the interest rate difference between Korea and the US has reached a record 2%. The likelihood of capital outflows resulting from further interest rate hikes by the US Federal Reserve cannot be ignored. However, Governor Lee maintains that the interest rate differential itself should not be a policy goal.
Governor Lee concluded by stating that decision-making should be based on a thorough evaluation of the situation. He rejected the notion that it would be safe to reduce the interest rate differential back to 1%.
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Money Today Sejong = Reporter Yoo Seon-il | 2023.10.21 05:40
[서울=뉴시스] Photo by All Reporters = Bank of Korea Governor Lee Chang-yong listens to reporters’ questions at a press conference on the Monetary Policy Committee’s October interest rate decision held at the Bank of Korea in Jung-gu, Seoul on the 19th. 2023.10.19 The Monetary Policy Committee of the Bank of Korea decided to freeze the base interest rate (3.5% per annum) with unanimous agreement among the members of the Monetary Policy Committee on the 19th. This is the 6th freeze in a row. Uncertainty in the outlook for the economy, prices, and household debt increased due to the unexpected effects of the Middle East conflict, and they agreed to “let’s wait and see how the situation develops.” Opinions were divided about the address after three months. Five of the six members of the Monetary Policy Committee, excluding Bank of Korea Governor Lee Chang-yong, weighed in on the ‘possibility of additional hikes.’ However, another person said that all ‘possibility of increase or decrease’ should be left open. This is in contrast to when the Bank of Korea regularly sent out warnings of additional austerity measures. Governor Lee’s concerns deepened further.
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Middle East conflict, impact on base interest rate
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The biggest variable that has arisen since last August’s Monetary Policy Committee is the conflict between the armed Palestinian political faction Hamas and Israel. There are predictions that this conflict, which began with the Hamas attack on Israel earlier this month, could escalate into a war in the Middle East. Countries around the world are paying attention to the impact this event will have on the global economy. Various related discussions were held at the recent general meeting of the International Monetary Fund (IMF) and the World Bank (WB) and the meeting of finance ministers and central bank governors of the G20 (20 major countries) held in Marrakech, Morocco.
There is talk of the possibility that global inflation (price rise) will accelerate due to this event, including a surge in international oil prices. The Bank of Korea’s position is that it is “difficult to predict” the impact of this event, but it does not deny the fact that it could be a factor in rising prices. This means that the Middle East conflict could be a factor in maintaining or raising the base interest rate at a high level.
In a press conference immediately following the Monetary Policy Committee meeting, Governor Lee said, “The rate of consumer price inflation this year and next year is considered more likely than last August’s forecast due to the effects of the ripple effect of higher international oil prices. and Israeli and Hamas exchange rates and events.”
On the contrary, the possibility that the Middle East conflict could be a factor to ease monetary policy cannot be ruled out. If the global economy stagnates due to war escalating in the Middle East and Korean growth is hit, pressure to lower interest rates may increase. Bloomberg recently said that in the worst case scenario if the war in the Middle East escalates, the global growth rate next year could drop by 1 percentage point to 1.7%.
The Bank of Korea assesses that our country’s economy is showing gradual improvement, but recovery is not certain. Governor Lee said, “We believe that uncertainty about the future growth path has increased due to the effects of increased geopolitical risks and the prolonged monetary tightening policy in major countries.”
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“Don’t expect interest rates in the 1% range” 3.5% for a long period of time? impressed?
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[서울=뉴시스] Photo by All Correspondents = Bank of Korea Governor Lee Chang-yong speaks at a press conference regarding the Monetary Policy Committee’s October interest rate decision held at the Bank of Korea in Jung-gu, Seoul on the 19th. 2023.10.19 Another indicator that the Bank of Korea pays attention to is ‘household debt.’ The Bank of Korea has recently issued messages to the market expressing concerns about the increase in household debt. The increase in household debt is a factor in maintaining or raising the base interest rate at a high level. The Bank of Korea announced in its ‘Financial Stability Report’ last month that the ratio of household credit to nominal GDP (gross domestic product) in the second quarter of this year was 101.7%, up 0.2 percentage points from the previous quarter (101.5%), in turned up for the first time in four quarters. They warned that the recent rebound in house prices and the increase in household loans could increase the household debt-to-GDP ratio further.
Governor Lee also said in a press conference, “Many members of the Monetary Policy Committee believe that it is undesirable for household debt to continue to increase, so I think the (ratio) to GDP should be lowered in gradually,” adding, “Monetary policy will not cause real estate prices to rise.” “There is a consensus,” he said.
Governor Lee also said, “There are a lot of people who are taking out leverage (loans) to invest in housing, but if you think the base interest rate will fall back to the 1% range like o ahead and the cost burden will be less, I would like to warn you about that.” “he said. It is not clear whether these comments refer to extending the current level of the base interest rate or to the possibility of a future increase.
For Governor Lee, voices that are ‘out of sync’ with the financial authorities are also a concern. The financial authorities are relaxing lending regulations, but some note that the financial authorities are emphasizing debt reduction, which is inconsistent with policy direction. In relation to this, Governor Lee said at a recent press conference in Morocco, “If household debt increases significantly or real estate prices in Seoul increase significantly, I should be outraged, but It’s frustrating to suddenly say that the financial authorities and the Bank of Korea have a different opinion.”
I can’t help but think that the interest rate difference between Korea and the US has widened to a record 2%c. The possibility of foreign capital outflows due to a further increase in interest rates by the US Federal Reserve cannot be ruled out. However, Governor Lee maintains the position that “the interest rate differential itself cannot be a policy goal.”
Governor Lee said, “I don’t think there is a theory that it would be safe to reduce the interest rate differential from 2% yp back to 1%p,” and added, “I think we have to for us to look at the situation and make a decision.”
[저작권자 @머니투데이, 무단전재 및 재배포 금지]
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