The Bank of Korea is raising interest rates in a shift away from pandemic era monetary policy as the country faces spiralling public debt.
The interest rate climbed 25 basis points from a rate of 0.5 per cent to 0.75 per cent following a 10 per cent increase in household debt and a 14.3 per cent hike to house prices.
While the interest rate remains a cut below pre pandemic levels of 1.25 per cent, last seen in early 2020, the Bank of Korea also pushed up its inflation projection from 1.8 to 2.1 per cent indicating that conditions are ripe for further policy tightening.
South Korea is the first developed economy to shift away from pandemic driven emergency economic support, raising speculation that a similar reversal could be on the cards in the UK and US.
In March 2020 the Bank of England cut the interest rate to 0.1 per cent in a bid to stimulate the economy by helping businesses and households take out loans more cheaply.
However, more than a year into the Covid-19 crisis inflation rates are soaring. Earlier this month, the Bank of England predicted that CPI (Consumer Price Index) inflation will reach 4.0 per cent in the final three months of 2021, well above the target level of 2.0 per cent.
While spiralling inflation is setting off alarm bells for many, in July Bank of England Governor Andrew Bailey said that it was important not to “over-react to temporarily strong growth and inflation.”
In the Bank’s latest report analysts predicted that the target interest rate could still be met in the medium term without changing the UK’s artificially low inflation rate.