Increase in Benchmark Interest Rate for the First Time in a Year
The Bank of Korea raised the nation's benchmark interest rate by 25 basis points to 1.75 percent on November 30, 2018 amid growing concern about ballooning household debt. The rate hike came for the first time in a year, reflecting the need to curb financial imbalances such as rising household debt and a widening gap between Korean and U.S. interest rates. The growing interest rate gap between the two countries has been blamed for an increase in capital outflows, posing risks to financial stability in Korea.
The central bank had frozen the key interest rate at 1.5 percent since November last year, when it raised its key rate for the first time since 2011 from a historic low of 1.25 percent. Although monetary policymakers recognized the need for the benchmark interest rate to be further raised, slowing economic growth and subdued inflation gave them reason to wait. The possibility that the nation's financial stability could be put at risk led the central bank to make its first rate hike in a year. Despite some voices of concern regarding a high level of economic uncertainty, the Governor of the BOK said that monetary policy still remains accommodative, with the economy expected to come in line with its potential growth rate and inflation to remain in a mid-to-upper one percent range.
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