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Subject Benchmark Interest Rate Outlook for 2023

Benchmark Interest Rate Outlook for 2023

 

Interest rates have risen across the world throughout 2022, and the Bank of Korea (BOK) has also been raising its benchmark interest rate to tame rising inflation. The BOK has made seven interest rate hikes for 2022, bringing the rate to 3.25% as of November 2022 - the highest level since 2012. With a recent 25%p increase, the central bank has returned to its usual pace of tightening after delivering two big step rate hikes in October and July. Despite the pace of rate increases was slowed, it is too premature to expect a pivot back toward rate cuts. As inflation has persistently stayed way above the central bank's target of 2.0%, the BOK is likely to maintain its tightening policy for some time to come.

 


Consumer price inflation eased to 5% in November compared to 5.7% in October due to the stabilization of food and energy prices. Since early 2022, the consumer price index in Korea has soared amid fallouts from the Russia-Ukraine war, which has been a setback to global economic prospects. A decline in the value of the Korean won has also been pushing up prices.

Inflation has been giving a hard time to both consumers and businesses. Consumers are feeling increasing strain not only from rising prices at the pump and grocery stores but also from higher interest payment burdens, while companies are under greater pressure from rising costs of materials, shipping, and labor. Households have been hit by the double whammy of red-hot inflation and rising interest rates. Korea’s household debt remained high at 105.6% of GDP in the second quarter of 2022, and debt repayment burdens for households have increased due to interest rate hikes.

The BOK has recently adjusted its consumer price inflation forecast for 2023 from 3.7% to 3.6%, lower than the current reading but still higher than the 2 percent target. Most major central banks across the world are tightening their monetary policy in the face of inflationary pressure fueled by massive economic stimulus during the pandemic, Russia’s invasion of Ukraine, and global supply chain bottlenecks. According to both local and international analysts, the BOK is also expected to raise interest rates further by the first quarter of 2023 as the upward trajectory of prices is likely to continue in the coming months. J.P. Morgan and a research arm of Hana Financial Group forecast that the BOK could lift the rate to 3.75% during the first three months of 2023. The global investment bank projected that the rate would stay unchanged at 3.75% until December 2023.