South Korea’s central bank raised interest rates on August 26 as financial risks increased.
The Bank of Korea lifted its policy to 0.75% for the first time in almost three years from a record low of 0.5%. Remarkably, South Korea became the first developed economy to raise interest rates during the pandemic era.
The move is directed at helping curb the country’s household debt and home prices, which skyrocketed in recent months.
According to Lee Ju-yeol, the Bank of Korea’s government, the decision to hike rates was not unanimous, and a dissenting board member was calling for rates to be held steady.
The country’s policymakers had been signaling that they were ready to increase the cost of borrowing since May. However, it was delayed as the latest coronavirus outbreak put South Korea into a partial lockdown in July.
South Korea’s benchmark index Kospi declined 0.18% following the announcement. Meanwhile, the Korean won declined.
Central banks across the world are striving to balance the impact of coronavirus infections against economic risks such as high inflation.
Most central banks across the world have cut rates to record lows to prop up their pandemic-hit economies. From the United States to Asia and Europe, governments worldwide have been rolling out stimulus measures in a bid to support businesses.
South Korea’s 7-day average daily infections gained past 1,800
Asia’s fourth-largest economy has been suffering from high numbers of coronavirus infections in recent weeks. Notably, its rolling 7-day average daily infections gained past 1,800, from just over 400 in June.
Last week, South Korea extended its social distancing curbs for another two weeks as coronavirus infections skyrocketed.
Furthermore, financial risks pressuring the economy are heating up house prices, which increased by 14.3% year-on-year in July. Household debt also surged by 10% year-on-year in Q2.
Last week, Sri Lanka became the first country in the region to lift interest rates.
Moreover, in the Asia-Pacific region last week, New Zealand was anticipated to become the first developed economy to boost rates in the wake of the COVID-19 crisis.
However, Prime Minister Jacinda Ardern imposed a national lockdown the day before the monetary policy decision was published.
The Reserve Bank of New Zealand (RBNZ) maintained its rate at a record low of 0.25%. Notably, the decision was made in the context of the government’s imposition of Level 4 coronavirus restrictions on activity across the country.