The Bank of Korea's Monetary Policy Board froze the benchmark interest rate at an annual 2.5% for the eighth consecutive time on the 28th, while strongly signaling its intention to soon shift toward a monetary tightening stance. BOK Governor Shin Hyun-song said after his first Monetary Policy Board meeting since taking office that "it is judged necessary to raise the benchmark rate at an appropriate time going forward." Governor Shin hinted that a rate hike is not far off, citing inflationary pressures, the continued improvement in economic growth over a considerable period, instability in the exchange rate and housing prices, and the fact that two board members issued minority opinions in favor of a rate hike. Markets are treating a July rate increase as a foregone conclusion, with some analysts suggesting two to three hikes are possible within this year. The BOK on the same day projected this year's economic growth rate at 2.6% and consumer price inflation at 2.7%, raising its previous forecasts by 0.6 percentage points and 0.5 percentage points, respectively.
When the benchmark rate rises, funding costs for businesses and households climb, dampening the stock market, consumption, and investment. In particular, growing interest burdens push small business owners and small and medium-sized enterprises—for whom an economic recovery already feels like another world—into even more difficult circumstances. Above all, with household debt approaching 2,000 trillion won, there is concern that the credit risk of "yeong-kkeul-jok"—those who borrowed to the hilt to invest—could grow larger. As expectations spread that the United States, Europe, and other major economies will also raise their benchmark rates within this year, worries are mounting that the "liquidity party" is coming to an end. Vigilance is required, given that when global tightening cycles began in the past, crises erupted at unforeseen "weak links" and even the real economy took a hit.
Authorities must preemptively prepare for the shocks that rate hikes will deliver to financial markets and the real economy. Moreover, in our economy of late, only a few sectors such as semiconductors are performing well, while the majority of manufacturing industries cannot escape a slump. Despite this, Kim Yong-beom, head of the Cheong Wa Dae Policy Office, recently said that "high interest rates, high prices, and a high exchange rate are the inevitable costs of success that accompany the process of economic takeoff." This may be a complacent perception that turns a blind eye to the actual state of our economy, which is masked by the semiconductor super cycle and a booming stock market. The government and the financial and monetary authorities must, through close policy coordination, review the financial crisis management system and do their utmost to strengthen household debt management, stabilize the real estate market, and support vulnerable groups. Since high interest rates also have the effect of efficiently allocating resources and shoring up the economy's fundamental strength, the wisdom to seize the opportunity for restructuring marginal companies is also needed.
