BOK Hikes Rates to 2.75% as Fiscal Expansion Cuts the Other Way

According to Yonhap, the Bank of Korea raised its benchmark rate to 2.75% last week, the first increase in 3 1/2 years, as it moved to curb inflation driven by oil prices, geopolitical tensions and a weaker won. Consumer prices have stayed above 3% for two straight months, while the won has traded above 1,500 against the US dollar through much of the past month.

The article said exports have hit record highs on a semiconductor boom, but the broader economy is under strain from nearly 2,000 trillion won ($US1.34 trillion) in household debt and rising borrowing costs. The BOK estimated that a 25 basis-point hike adds about 1.8 trillion won in annual interest expenses for self-employed borrowers, while delinquency rates among the self-employed have climbed to a 10-year high. It also said nearly 40% of companies are unable to earn enough operating profit to cover interest expenses.

The Lee Jae Myung administration is preparing an expansionary budget of more than 800 trillion won for next year and has floated additional spending backed by stronger-than-expected semiconductor tax revenue. The article argued that tighter monetary policy and looser fiscal policy are working in opposite directions, and said any windfall semiconductor tax revenue would be better used to strengthen public finances and support structural reform than to fund broad stimulus.