South Korea’s central bank on Thursday carried out its first rate hike since the pandemic began, marking a major turnaround from its expansionary stance that had been proactively deployed to buttress the nation’s virus-hit economy for the last 15 months.

The rate hike marked the first case of a central bank in a major Asia-Pacific economy tightening monetary policy, reflecting concerns over overheated markets and growing inflationary pressure.

The Bank of Korea raised its benchmark interest rate by 25 basis points to 0.75 percent from its previous record-low rate of 0.5 percent, citing the economy’s “modest” pace of recovery and rising inflation. Expressing confidence over economic players’ capability in debt payments and extra cash saved, the central bank also denied the risk of Asia’s fourth-largest economy falling into a debt trap.

The move is projected to gradually end the “ultralow interest rate” that has continued since the BOK slashed its key rate to 0.5 percent in May last year. The mood had Koreans flocking to banks to borrow more loans to invest in real estate and stocks, stoking fears of an asset price bubble and snowballing household debt.

“We decided to take the first step toward alleviating the accumulated financial imbalance,” BOK Gov. Lee Ju-yeol told reporters following the year’s sixth rate-setting meeting.

The rate hike would quell people’s need for risky assets and put a brake on the snowballing household debt and surging housing prices, Lee explained.

The monetary policy chief also hinted at more rate hikes and policy normalizations to come, saying that “financial imbalance cannot be resolved through a single rate increase.” But he said that the timeline for the next rate hike would “not be carried out in a hurry nor in a delay.”

Korea’s snowballing household debt has led to excess liquidity in the market, widening the gap between the financial markets and the real economy, prompting financial imbalance.

Korea’s household credit reached a record high of 1,805.9 trillion won ($1.54 trillion) as of end-June, up 41.2 trillion won from three months earlier.

Despite Lee’s denial of the Korean economy entering a debt trap, concerns have been growing that borrowers would still have to brace for heavier burdens in debt repayment.

According to BOK data acquired and analyzed by an opposition lawmaker here, if the central bank bumps up 100 basis points, the value of total debt interest repayment gains some 12 trillion won, overall. In this sense, a 25 basis point hike would result in a gain of some 3 trillion won.

The BOK’s latest move also came before the US Federal Reserve’s rate hike, which industry watchers expect to come as early as 2022.

This was not the first time for the central bank to hike the rate ahead of the US Fed, as it did so in July 2010, less than two years after the 2008 financial crisis. The US Fed only carried out its first rate hike after the global economic crisis in December 2015.

The US Fed, meanwhile, is likely to start tapering before the end of the year, its July meeting minutes showed.

Thursday’s rate hike marks not only the first of its kind for the BOK since the pandemic, but since November 2018 as well.

In terms of growth outlook, it kept this year’s forecast flat at 4 percent, but lifted its inflation outlook for the cited period to 2.1 percent from the previous 1.8 percent.

Korea is currently combating its worst yet fourth wave of COVID-19 outbreaks with the delta variant pushing up daily new infections above 1,000 since early July.

Despite the ongoing pandemic, exports -- which account for half of the economy -- have been rebounding at a steady pace.

Outbound shipments jumped 29.6 percent on-year to a record high of $55.4 billion in July, extending their gains to a ninth straight month.

(mkjung@heraldcorp.com)