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South Korea hikes rates, will Asia follow?

 
Infinox Contributor
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South Korea hikes rates, will Asia follow? (Source: Getty)

South Korea is taking everything in its stride, including the threat of war.

While the Pyongyang’s latest missile test landed somewhere in the Sea of Japan, the Bank of Korea (BOK) raised interest rates for the first time since 2011 as the economy exceeded even the highest of expectations.

3rd quarter figures show GDP growing by 1.5 per cent, up by 0.1 per cent on BOK predictions. Furthermore, GDP is 3.8 per cent higher than it was this time last year, also more than the 3.6 per cent that was forecast.

All this means the BOK is confident enough to buck the trend of other Asian central banks, raising interest rates from its historic low of 1.25 per cent to 1.50 per cent.

It’s unclear whether or not this will be an example for the rest of the continent. South Korea is the first Asian country to raise interest rates since Sri Lanka did so in 2014, but central banks in the region have come under increasing pressure to do so since the US Federal Reserve did earlier this year.

Reluctance is heavily affected by the fortunes of the region’s economic power – China. The People’s Bank of China (PBOC) itself raised interest rates earlier this year. However, there are still concerns that China's debt, currently more than 300 per cent of GDP, could trigger a devastating downturn one day soon.

In response, China has been heavily regulating foreign companies based in the country and their own overseas investment.

Most of Asia’s very worried. Since the 2008 crash, China has boosted trade with the ten other biggest economies in the region by 60 per cent, whereas the US has only done so by 25 per cent. Should China slow down even faster, or greatly reduce trade with its neighbours, the whole region will suffer.

Considering this and much else South Korea’s buoyancy is remarkable. It has no natural resources to speak of, is crowded by bigger and, relatively, richer nations and only began to properly industrialise 40 years ago. Despite all this, it’s believed growth will continue into 2018 and beyond, so much so South Koreans will probably have a better standard of living than the French by 2020.

The growth is down largely down to increasing exports, especially in electronics. Big household names, such as, Samsung and Caterpillar Inc, are the big winners. South Korea isn’t alone in enjoying rapid economic growth. It’s the most populous member of a group called the NIE, the Newly Industrialised Economies (or NIC, Newly Industrialised Countries), that have slowly overtaken the Asia’s former economic power - Japan.

When measuring GDP per person, Tokyo now sits behind Hong Kong, Taiwan and Singapore. With the two economies moving rapidly in opposite directions, South Korea will also find itself richer than Japan before long.

On announcing the interest rate hike, BOK governor Lee Ju-yeol predicted that the economy will grow by another 3 per cent by the end of next year. It was also implied that further rate rises might be on the way in order to keep up with the Federal Reserve – widely expected to increase its own rates again before the end of 2017.

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