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  • The Bank of Korea raises benchmark rate by a whopping 0.5%p.
    2022-07-18 hit 323

    The Bank of Korea raises benchmark rate by a whopping 0.5%p.


    Such a move triggered concerns of economic organizations as it may negatively affect business activities, which led them to call for controlling of the pace of rate hikes.


    The pace of future benchmark rate hikes should be controlled as households and businesses are not properly equipped with the means to swiftly adjust to a sudden change of the financial environment.

     

    The Monetary Policy Board of the Bank of Korea raised the current benchmark interest rate on July 13 by 0.5 percentage point, from 1.75% to 2.25 percent. A 0.5 percentage point increase is the biggest increase since the bank adopted the current policy system in 1999 and it is the first time for the Bank of Korea to raise benchmark interest rate three times a row.


    In response to the decision made by the Bank of Korea to raise benchmark interest rate by 0.5 percentage point, the economic circle unanimously announced, “The pace of interest rate hikes need to be controlled in the future as aggressive rate hikes may dampen business performance and investments.” Gwang-ho Choo, the Head of the Economic Research Division from the Federation of Korean Industries, released a statement that reads, “We judge the decision by the Bank of Korea to raise benchmark interest rate by 0.5 percentage point is attributable to a) rising consumer prices in the country and b) the U.S. maintaining a hawkish stance on raising its benchmark rate.”


    Mr. Choo mentioned in the statement, “It is imperative to control the pace of rate hikes in the future as households and businesses are not properly equipped with the means to swiftly adjust to a sudden change of the financial environment” and recommended, “The government should lead efforts to alleviate the pressure of interest rate hikes by stabilizing the value of the Korean Won through reducing trade deficit and eventually making the trade balance shift to a surplus.”


    Mr. Choo also stressed, “The fundamentals of the Korea economy need to be strengthened by creating a business-friendly environment through deregulation and easing tax requirements along with investing effort to boost the confidence in the Korean economy in the global market.”


    Mr. Jin Lim, who leads the Sustainable Growth Initiative (SGI) at the Korea Chamber of Commerce and Industry mentioned, “Although raising the benchmark interest rate was somewhat inevitable to curb inflation and stabilize the value of the Korean Won, we express concern over a greater risk of households and corporates defaulting on their debt and a contraction of the economy.” He recommended, “The pace of rate hikes should be adjusted by factoring in the actual situation of the economy and main economic players’ capability to withstand the effects of rate hikes, which should be implemented along with measures to subsidize vulnerable small and mid-sized companies to minimize the side effects of future monetary policies.”


    The Korea Enterprises Federation warned that corporate investments may see a decline. The organization said, “Although hiking benchmark interest rate is a measure to deal with high inflation and a move made by the U.S. to hike its benchmark interest rate, we express concern that a steep rise in benchmark rate will result in greater financial burden for corporates, which may lead to scaling down their investment and also result in a chain reaction of negatively affecting private spending.”


    The organization also added, “We predict that distressed SMEs that are already pushed to the brink will be particularly hit hard and the government should devise multi-faceted policies to minimize shock in the market.”

    The Korea International Trade Association announced that the central bank’s decision to hike benchmark rate will be helpful for stabilizing the value of the currency, but also added the government should support the real economy with policies as the real economy is already in an unfavorable position. Sang-sik Jang, the head of the team responsible for performing analysis of trade trends at the Institute for International Trade said, “Although the trade business had to suffer mounting cost due to rising raw material prices and a depreciation of the Korean Won, today’s announcement by the Bank of Korea to hike benchmark rate will contribute to stabilizing the value of our currency.”


    Mr. Jang also strongly recommended, “As today’s benchmark rate hike will also trigger a rise of corporate interest rates, initial costs for exports and other operational costs, which may lead to concerns of negatively affecting production and investment, it is imperative for the government to support the export sector by offering loans at lower rates as a policy.” On July 13, the Monetary Policy Board of the Bank of Korea raised the current benchmark interest rate on July 13 by 0.5 percentage point, from 1.75% to 2.25 percent.

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