Bank of Korea Raises Key Interest Rate for First Time in 42 Months, Increasing Burden on Borrowers

[Anchor]

The Bank of Korea has raised the base interest rate by 0.25 percentage points, sending a strong signal that it has entered a cycle of interest rate hikes. The central bank stated that with growth and inflation figures coming in higher than initially expected, there is both the capacity and the necessity to raise rates.

Reporter Min Gyeongho has the story.

[Reporter]

The Bank of Korea's Monetary Policy Board has decided to raise the base interest rate by 0.25 percentage points to 2.75 percent.

This marks the end of eight consecutive freezes and the first rate hike in three and a half years, since January 2023.

The shift toward monetary tightening is primarily driven by concerns over inflation.

With the consumer price index having soared to 3.2 percent last month, the impact of high oil prices resulting from the war in the Middle East is expected to persist for more than a year.

Furthermore, the board considered the possibility that inflation could rise further as improved income, fueled by strong semiconductor exports and a more than 13 percent growth in gross domestic income in the first quarter, stimulates domestic demand.

The continued growth in household debt and the fact that the exchange rate remains at a high level also served as justification for the hike.

With economic growth indicators expected to improve significantly, the burden associated with raising interest rates has been reduced.

[Shin Hyun-song / Governor of the Bank of Korea: All components of GDP are showing significant strength. (The existing growth forecast for this year of) 2.6 percent is too low. At the August monetary policy meeting, it will likely be adjusted upward by a considerable margin.]

The Bank of Korea stated that the decision was unanimous among the seven members of the Monetary Policy Board and that it is necessary to continue the trend of interest rate hikes moving forward.

The market is raising the possibility of additional hikes within the year, such as in August or October.

The foreign exchange market reacted immediately to the expectation that the interest rate gap with the United States, which has narrowed to 1 percentage point, could shrink further.

The won-dollar exchange rate, which had been approaching 1,490 won, began to fall simultaneously with Governor Shin's press conference.

The Korean won showed its greatest strength during the remarks where Governor Shin hinted at additional interest rate hikes.

[Shin Hyun-song / Governor of the Bank of Korea: The upcoming meetings (of the Monetary Policy Board) will be... what we call live meetings. We are keeping all possibilities open.]

However, the burden on those who have taken out loans to invest in stocks or those who have exhausted their borrowing capacity to purchase real estate is bound to increase along with the higher interest rates.

The interest burden for self-employed individuals is also expected to increase by 1.8 trillion won per year, or 560,000 won per person annually.

Regarding concerns over the impact of rate hikes on vulnerable groups, Governor Shin said it would be appropriate to supplement the situation with fiscal or financial policies that can produce selective policy effects.

(Video editing: Kim Jun-hee)
※ Please note: This article was translated by AI and may contain errors.