The Bank of Korea’s monetary policy board voted to raise the benchmark 7-day repo rate from 2.5 percent to 3 percent at a rate-setting meeting earlier in the day, according to the central bank. This is the first time in nearly 10 years that the rate has risen to the 3 percent range.
The rate hike marks the eighth rate hike – a combined 2.5 percentage point – since August last year when the Bank of Korea started raising borrowing costs, which had remained at a record low, to support the coronavirus-hit economy.
It also marked the fifth straight increase and the second major step up since the first ever 50 basis point increase in July.
The Bank of Korea was widely expected to raise the benchmark interest rate as it gives top priority to taming inflation that has been soaring amid the energy products and expensive goods that the country mostly imports.
The country’s consumer prices, a key measure of inflation, rose 5.6 percent on an annual basis in September.
The increase was slightly down from a jump of 5.7 percent in August but remained high and could rise again at any time depending on the path of oil and energy prices.
Policy makers are concerned that capital outflows could accelerate the South Korean currency’s slide against the US dollar and redouble Seoul’s efforts to rein in inflation as a weaker currency makes imports more expensive. The won has fallen about 17 percent against the dollar so far this year, according to South Korea’s Yonhap news agency.
Concerns are growing that sharp increases in interest rates will increase the financial burden on debt-laden households, increasing the likelihood that those without ample financial resources will default on their loans and reduce their spending.
South Korea’s economy is facing a state of increasing uncertainty, including slowing export growth and a growing trade deficit that could worsen if monetary policy tightening in major countries prolonged, pushing the global economy into recession.
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