By William Pesek
The Bank of Korea’s ascent is likely to be slow. On Thursday, South Korea became Asia’s first major economy to lift benchmark interest rates since the U.S. Federal Reserve started tightening two years ago. The 25 basis-point increase to 1.5 percent reflects welcome economic strength – but that must be balanced against mounting threats to Korean growth and North Asian stability.
The tightening by Bank of Korea Governor Lee Ju-yeol and his colleagues signals confidence in the growth trajectory of Asia’s fourth-biggest economy and the health of its financial system. Helped by heady demand for memory chips, South Korean output grew 1.4 percent quarter on quarter between July and September.
Economists polled by Reuters see exports rising 10.1 percent in November from a year earlier. And inflation is likely to hold at 1.8 percent this month, not far short of Seoul’s 2 percent target.This is, however, more about normalising monetary policy after the financial crisis than it is about curtailing runaway growth. Another increase or two in 2018 is possible, but an aggressive tightening cycle seems unlikely.
That’s partly because of domestic headaches. Household debt amounts to roughly 90 percent of gross domestic product, threatening the consumption outlook. Incomes, adjusted for inflation, slipped 0.2 percent year-on-year in the third quarter. And there are hints the housing market is losing steam: in October the BOK warned mortgage curbs introduced in August might cause demand to slow. Additional rate hikes could also boost the won, potentially hurting exports.
Internationally, risks abound too, including the provocations of North Korean leader Kim Jong Un. There’s no telling how U.S. President Donald Trump might respond to Kim’s latest missile launch this week, which suggests Pyongyang could reach Washington with a nuclear warhead. The risk of a growth-sapping trade war looms, too, as evidenced by Trump’s aggressive stance on aluminium imports from China. The central bank has to tread carefully.
The Bank of Korea raised its benchmark interest rate on Nov. 30 by 25 basis points to 1.5 percent, ending a five-year easing cycle. The bank last raised interest rates in June 2011, to 3.25 percent.
Youth unemployment stood at a seasonally-adjusted 8.7 percent in October, down from 9.4 percent in September. Overall unemployment was a seasonally-adjusted 3.6 percent, compared with 3.7 percent a month earlier.
On Aug. 2, President Moon Jae-in’s administration took steps to calm an overheating housing market, including higher taxes and curbs on speculation. On Oct. 21, the BOK said in a report: “The upward trend is expected to slow next year because construction companies will expand supply, the major economies are set to raise interest rates and the government is showing strong willingness to stabilize the housing market.”
William Pesek is a Tokyo-based journalist, former columnist for Barron’s and Bloomberg and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.”