{"id":2197437,"date":"2022-07-13T19:32:21","date_gmt":"2022-07-13T10:32:21","guid":{"rendered":"https:\/\/www.nknews.org\/pro\/?p=2197437"},"modified":"2023-04-05T16:12:10","modified_gmt":"2023-04-05T07:12:10","slug":"what-the-bank-of-koreas-rate-spike-means-for-the-south-korean-economy","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2022\/07\/what-the-bank-of-koreas-rate-spike-means-for-the-south-korean-economy\/","title":{"rendered":"What the Bank of Korea\u2019s rate spike means for the South Korean economy"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">South Korea\u2019s central bank <\/span><a href=\"http:\/\/yna.kr\/AEN20220713001751320\"><span style=\"font-weight: 400;\">took<\/span><\/a><span style=\"font-weight: 400;\"> the highly unusual step on Wednesday of raising its target policy rate by 0.5 percentage point (pp) to 2.25% from 1.75%.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The speed of the rise, which still leaves BOK policy lagging behind the Federal Funds Rate ahead of the next meeting of the Fed\u2019s Federal Open Market Committee (FOMC) later this month, appears to be designed to achieve the following goals.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">First, it is a step to ensure that the exchange rate remains stable. An excessively strong dollar is bad news for South Korean consumers and firms, but also for U.S. exporters. The BOK\u2019s head has signaled hopes for a swap agreement that would allow it to better defend the exchange rate.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Second, raising the costs of borrowing will suppress household and firm-level demand, with the expectation that this will slow down domestic drivers of inflation.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The Bank of Korea (BOK) had begun to <\/span><a href=\"https:\/\/www.bok.or.kr\/portal\/singl\/baseRate\/progress.do?dataSeCd=01&amp;menuNo=200656\"><span style=\"font-weight: 400;\">raise<\/span><\/a><span style=\"font-weight: 400;\"> rates in Aug. 2021, but the sudden spike will likely bring with it consequences for the South Korean economy that may include:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A policy rate that lags behind the <\/span><a href=\"https:\/\/fred.stlouisfed.org\/series\/DFEDTARU\"><span style=\"font-weight: 400;\">pace<\/span><\/a><span style=\"font-weight: 400;\"> of U.S. Federal Reserve interest rates, especially with 0.75 pp increase apparently <\/span><a href=\"https:\/\/www.wsj.com\/articles\/feds-christopher-waller-supports-another-0-75-point-rate-rise-in-july-11657216604\"><span style=\"font-weight: 400;\">on the horizon<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">More capital flight, which has already become a problem in the Korean stock market. Exchange rates are also worrying because of their impact on the balance of trade and inflation; lower rates relative to the U.S. Federal Funds Rate put pressure on both.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Higher inflation. South Korean consumers have been relatively insulated from high inflation rates seen in other developed economies but it has been ticking up over past months.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A more volatile won now and, going forward, rising borrowing costs for South Korean households, firms and the government.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Greater rates of loan delinquencies that partially offset any increases in interest income for banks and other financial institutions.<\/span><\/li>\n<\/ul>\n<div id=\"attachment_2197439\" style=\"width: 1880px\" class=\"wp-caption alignleft\"><img decoding=\"async\" aria-describedby=\"caption-attachment-2197439\" class=\"wp-image-2197439 size-full\" src=\"https:\/\/www.nknews.org\/pro\/wp-content\/uploads\/sites\/4\/2022\/07\/stacks-on-stacks-of-cash-south-korea.jpg\" alt=\"\" width=\"1870\" height=\"1000\" \/><p id=\"caption-attachment-2197439\" class=\"wp-caption-text\">Pallets of South Korean currency at the Bank of Korea Museum in Seoul on Aug. 8, 2013 | Image: <a href=\"https:\/\/www.flickr.com\/photos\/traveloriented\/9461440257\/in\/photostream\/\">travel oriented<\/a> on Flickr <span class=\"cc-license-identifier\">(<a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/2.0\/\">CC BY-SA 2.0<\/a>)<\/span><\/p><\/div>\n<p><b>BEHIND THE SPIKE<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The BOK was early to the party in raising interest rates. It preempted the Fed by almost seven months, raising its policy rate from 0.5% to 0.75% in late Aug. 2021, whereas the Fed only began raising rates in early March 2022. Back then, the primary <\/span><a href=\"https:\/\/biz.chosun.com\/policy\/policy_sub\/2021\/07\/02\/NG2ABZZDUVHS3EAI2PA5XVZ4ZY\/\"><span style=\"font-weight: 400;\">motivations<\/span><\/a><span style=\"font-weight: 400;\"> were the overheating housing market and rapidly rising debt levels.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The South Korean housing market has stabilized and now appears in the <\/span><a href=\"https:\/\/www.asiatime.co.kr\/article\/20220712500295\"><span style=\"font-weight: 400;\">midst<\/span><\/a><span style=\"font-weight: 400;\"> of a price correction. Household credit growth <\/span><a href=\"https:\/\/www.index.go.kr\/potal\/main\/EachDtlPageDetail.do?idx_cd=1076&amp;param=003\"><span style=\"font-weight: 400;\">declined<\/span><\/a><span style=\"font-weight: 400;\"> in the first quarter of 2022 \u2014 the first time that household debt has declined on a quarterly basis in almost a <\/span><a href=\"https:\/\/www.index.go.kr\/potal\/stts\/idxMain\/selectPoSttsIdxSearch.do?idx_cd=1076\"><span style=\"font-weight: 400;\">decade<\/span><\/a><span style=\"font-weight: 400;\">. So why is the BOK not only continuing to raise rates but increasing the size of these jumps?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The primary reason appears to be accelerating consumer price inflation. Unlike asset prices, consumer price stability is a core priority for the BOK and central banks everywhere. And the country faces growing <\/span><a href=\"https:\/\/www.nknews.org\/pro\/why-inflation-is-finally-spiking-in-south-korea-months-after-the-us\/?t=1665462664744\"><span style=\"font-weight: 400;\">problems<\/span><\/a><span style=\"font-weight: 400;\"> with inflation, even if many of those problems are not domestic in origin.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Another major concern connected to inflation is the stability of the country\u2019s currency and its financial markets. The won has lost a <\/span><a href=\"https:\/\/www.google.com\/search?q=usd+to+krw&amp;rlz=1C1FKPE_koKR935KR935&amp;oq=usd+to+krw&amp;aqs=chrome.0.69i59i512j0i512l9.2473j1j7&amp;sourceid=chrome&amp;ie=UTF-8\"><span style=\"font-weight: 400;\">substantial<\/span><\/a><span style=\"font-weight: 400;\"> amount against the dollar since mid-2020 and is now trading at near-record lows. A weak currency makes imports more <\/span><a href=\"https:\/\/www.kita.net\/cmmrcInfo\/internationalTradeStudies\/researchReport\/focusBriefDetail.do?pageIndex=1&amp;no=2300&amp;classification=1&amp;searchReqType=detail&amp;pcRadio=&amp;searchClassification=&amp;searchStartDate=&amp;searchEndDate=&amp;searchCondition=TITLE&amp;searchKeyword=&amp;continent_nm=&amp;continent_cd=&amp;country_nm=&amp;country_cd=&amp;sector_nm=&amp;sector_cd=&amp;itemCd_nm=&amp;itemCd_cd=&amp;searchOpenYn=\"><span style=\"font-weight: 400;\">expensive<\/span><\/a><span style=\"font-weight: 400;\">, helping to further drive inflation.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, the rates of decline in the value of the won against the dollar <\/span><a href=\"https:\/\/www.bok.or.kr\/portal\/bbs\/P0000559\/view.do?nttId=10071609&amp;menuNo=200690&amp;pageIndex=1\"><span style=\"font-weight: 400;\">compare reasonably favorably<\/span><\/a><span style=\"font-weight: 400;\"> with other developed and emerging markets over the past few months. The same data also indicates that capital continues to leave the South Korean stock market, but the pace of the exit has slowed, and foreign investors appear to have growing interest in South Korea\u2019s bond market.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This makes the rate rise look more defensive in nature: designed to guard against the possibility of faster currency depreciation, a bigger flight of foreign investors from Korean markets, and\/or a more rapid escalation of inflation. The change seeks to keep things steady rather than fundamentally change the direction of travel.\u00a0<\/span><\/p>\n<div id=\"attachment_2194348\" style=\"width: 1610px\" class=\"wp-caption alignnone\"><img decoding=\"async\" aria-describedby=\"caption-attachment-2194348\" class=\"wp-image-2194348 size-post_feature_image_retina\" src=\"https:\/\/www.nknews.org\/pro\/wp-content\/uploads\/sites\/4\/2022\/02\/dollar-bills-1600x1000.png\" alt=\"\" width=\"1600\" height=\"1000\" \/><p id=\"caption-attachment-2194348\" class=\"wp-caption-text\">Image: <a href=\"https:\/\/www.pexels.com\/photo\/us-dollar-bills-5466788\/\">Pexels<\/a><\/p><\/div>\n<p><b>WHAT HAPPENS NEXT<\/b><\/p>\n<p><span style=\"font-weight: 400;\">If the BOK achieves its goal of keeping things steady, household indebtedness should continue to fall. If the exchange rate improves, then the balance of trade should also get better, with the result that firms will become more profitable (facing lower import prices) and the exchange rate\u2019s effects on inflation will also be mitigated.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This rosy picture may, however, be clouded by the potential for further flight of foreign capital from the country\u2019s stock market, which investment in corporate bonds may only partially offset. Rising interest rates will raise the costs of borrowing for the government and the private sector, increasing fiscal retrenchment on both sides, as well as on households.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Firms with higher borrowing costs may become less profitable, offsetting any gains from lower import costs. The result could be a continued selloff in South Korea\u2019s stocks.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">What\u2019s more, if government, corporate and household borrowing for investment and consumption drop, this will have negative consequences for economic growth. Currently, the prediction making the rounds from a senior FED official is that the U.S. policy rate could hit 3.5% by the end of the year. The BOK governor predicted a rate of 2.75-3% by the end of the year for the BOK.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This could mean the currency comes under further pressure because U.S. interest rates incentivize investors to put their money in dollars rather than won. If so, the BOK may be forced to speed up its rate-raising, and South Korean consumers and firms will be pushed to cut back, with negative consequences for both.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There are also growing fears that the Fed will have to tighten for longer than previously expected and that global stock and bond markets have not <\/span><a href=\"https:\/\/www.ft.com\/content\/4ea1dc1d-9bfb-4a8c-90a3-6f76aedc0b8c\"><span style=\"font-weight: 400;\">priced<\/span><\/a><span style=\"font-weight: 400;\"> this in. As of now, South Korea has very low <\/span><a href=\"https:\/\/www.index.go.kr\/potal\/main\/EachDtlPageDetail.do?idx_cd=1094\"><span style=\"font-weight: 400;\">default<\/span><\/a><span style=\"font-weight: 400;\"> rates on loans. BOK <\/span><a href=\"https:\/\/www.bok.or.kr\/portal\/bbs\/P0000593\/view.do?nttId=10071240&amp;menuNo=200449&amp;pageIndex=1\"><span style=\"font-weight: 400;\">reports<\/span><\/a><span style=\"font-weight: 400;\"> on the country\u2019s financial system indicate that the country\u2019s banks have healthy and growing margins, which have <\/span><a href=\"https:\/\/biz.chosun.com\/stock\/finance\/2022\/07\/06\/AAY3S5URLRBIRJQFIYVZZUEN34\/\"><span style=\"font-weight: 400;\">caused<\/span><\/a><span style=\"font-weight: 400;\"> significant political controversy \u2014 banks have been accused of profiteering.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Conversely, non-banking financial institutions including insurers, securities firms, loan specialists and mutual financials also have significant exposure to credit markets (in the form of household and corporate loans). Their capital reserves are less than the country\u2019s banks, and they are more vulnerable to rising defaults.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Still, even significant rate rises are not expected to trigger mass defaults and a financial crisis. There may be localized crises in certain segments of the financial system, however, with warnings that the country\u2019s savings banks already face rising <\/span><a href=\"https:\/\/www.hankyung.com\/finance\/article\/2022062161751\"><span style=\"font-weight: 400;\">delinquencies<\/span><\/a><span style=\"font-weight: 400;\"> due to the poor quality of their loan books.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Overall, South Korea faces the definite prospect of a recession, as does the <\/span><a href=\"https:\/\/www.reuters.com\/markets\/us\/imf-chief-says-cannot-rule-out-possible-global-recession-2022-07-06\/\"><span style=\"font-weight: 400;\">world<\/span><\/a><span style=\"font-weight: 400;\">. Inflation-induced rate rises are liable to significantly curtail growth and hurt many firms and households. There may be no realistic alternative if the BOK wants to reign in domestic sources of inflation and defend the currency, but it will be painful all the same.\u00a0<\/span><\/p>\n<p><i><span style=\"font-weight: 400;\">Edited by Arius Derr<\/span><\/i><\/p>\n<div class=\"content-tags\"><a href=\"https:\/\/koreapro.org\/tag\/business-economy\/\"><span class=\"tag\">Business &amp; Economy<\/span><\/a><\/div>","protected":false},"excerpt":{"rendered":"<p>South Korea\u2019s central bank took the highly unusual step on Wednesday of raising its target policy rate by 0.5 percentage point (pp) to 2.25% from 1.75%.\u00a0 The speed of the rise, which still leaves BOK policy lagging behind the Federal Funds Rate ahead of the next meeting of the Fed\u2019s Federal Open Market Committee (FOMC) [&hellip;]<\/p>\n","protected":false},"author":3665,"featured_media":2197438,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[21],"tags":[24],"class_list":["post-2197437","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-business-economy"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What the Bank of Korea\u2019s rate spike means for the South Korean economy - KOREA PRO<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/koreapro.org\/2022\/07\/what-the-bank-of-koreas-rate-spike-means-for-the-south-korean-economy\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What the Bank of Korea\u2019s rate spike means for the South Korean economy - KOREA PRO\" \/>\n<meta property=\"og:description\" content=\"South Korea\u2019s central bank took the highly unusual step on Wednesday of raising its target policy rate by 0.5 percentage point (pp) to 2.25% from 1.75%.\u00a0 The speed of the rise, which still leaves BOK policy lagging behind the Federal Funds Rate ahead of the next meeting of the Fed\u2019s Federal Open Market Committee (FOMC) [&hellip;]\" \/>\n<meta property=\"og:url\" content=\"https:\/\/koreapro.org\/2022\/07\/what-the-bank-of-koreas-rate-spike-means-for-the-south-korean-economy\/\" \/>\n<meta property=\"og:site_name\" content=\"KOREA PRO\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/nknewsorg\/\" \/>\n<meta property=\"article:published_time\" content=\"2022-07-13T10:32:21+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-04-05T07:12:10+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/koreapro.org\/wp-content\/uploads\/sites\/6\/2022\/07\/13908682945_7c2e376def_k-1-1.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"2017\" \/>\n\t<meta property=\"og:image:height\" content=\"1079\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Bishawjit\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@southkoreapro\" \/>\n<meta name=\"twitter:site\" content=\"@southkoreapro\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Peter Ward\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/koreapro.org\/2022\/07\/what-the-bank-of-koreas-rate-spike-means-for-the-south-korean-economy\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/koreapro.org\/2022\/07\/what-the-bank-of-koreas-rate-spike-means-for-the-south-korean-economy\/\"},\"author\":{\"name\":\"Bishawjit\",\"@id\":\"https:\/\/koreapro.org\/#\/schema\/person\/313e6f940bf1ae7b8cc487ec00b1b562\"},\"headline\":\"What the Bank of Korea\u2019s rate spike means for the South Korean economy\",\"datePublished\":\"2022-07-13T10:32:21+00:00\",\"dateModified\":\"2023-04-05T07:12:10+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/koreapro.org\/2022\/07\/what-the-bank-of-koreas-rate-spike-means-for-the-south-korean-economy\/\"},\"wordCount\":1178,\"publisher\":{\"@id\":\"https:\/\/koreapro.org\/#organization\"},\"image\":{\"@id\":\"https:\/\/koreapro.org\/2022\/07\/what-the-bank-of-koreas-rate-spike-means-for-the-south-korean-economy\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/assets.korearisk.com\/uploads\/sites\/6\/2022\/07\/13908682945_7c2e376def_k-1-1.jpg\",\"keywords\":[\"Business &amp; 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