Era of Record-Low Interest Rate Is Over as S.Korea Initiates First Hike

The Bank of Korea (BOK) is the first major economy in Asia as well as the first developed country to hike policy rates in the Covid-19 pandemic era by 25bps to 0.75%. The Korean stock market fell slightly by 0.13% after the announcement.

 

The hike came in the morning of Thursday’s trading session, which was more or less not a surprising move since 16 of 30 analysts saw this coming as surging household debt created new threats for the economy.

 

Kospi, South Korea’s benchmark, made a sudden downturn to negative territory after the announcement, while the Korean won strengthened.

In the meeting on Thursday, the BOK maintained its economic outlook at 4% for 2021 but upgraded consumer inflation forecast from 1.8% to 2.1%, which signals that conditions are building toward further policy tightening. There are two more interest rate review meetings scheduled in 2021.

Aside from Asia’s fourth-largest economy, South Korea, other central banks are laying the groundwork for their own hikes from a record low, enforced by the Covid-19 crisis that weighed heavily on the economy. However, the stimulus through lower interest rates started to have a negative impact on the economy as well.

 

The U.S. Federal Reserve (Fed) also signaled for a tapering in asset purchase starting later this year.

Investors are focusing on Fed’s Chair Jerome Powell, scheduled to speak at the Jackson Hole symposium on Friday, which may provide insight into how and when the pullback on asset purchase will start. This will set the timetable for how soon the policymakers will start raising interest rates.

 

As for the Thai central bank, the Monetary Policy Committee agreed to keep policy rates at a record low of 0.50%, seeing that the policy rate was already low. However, minority votes during the last meeting favored cutting down the policy rate by 0.25 percentage points.

According to economists and analysts, the Bank of Thailand is expected to raise interest rate in late 2022.