CNBC | PUBLISHED WED, NOV 24 2021 11:18 PM EST

South Korea’s central bank raised interest rates and revised up its inflation outlook on Thursday as concerns about rising household debt and prices pointed to further policy tightening next year.

The central bank is expected to continue its policy tightening cycle with rates tipped to reach 1.50% by the end of 2022, raising concerns about whether households will be able to service their debt repayments.

The Bank of Korea’s monetary policy board lifted borrowing costs by 25 basis points to 1.00% — a move expected by 29 of 30 analysts in a Reuters poll.

Analysts now expect the next rate hike could come as soon as January, ahead of South Korea’s March presidential election. Lee Jae-myung, the ruling party’s presidential candidate, has warned of a potential collapse in the housing market as interest rates rise, with Seoul home prices roughly doubling over the past five years.

“With rates increasing, debt repayment burdens for households would definitely rise, which would weigh on household financing and consumption,” said Cho Yong-gu, a fixed-income analyst at Shinyong Securities. “I think the hurdle for further rate hikes will be higher once the policy rate reaches 1.25%.”

Averting asset bubbles has been outgoing President Moon Jae-in’s top policy priority as more than two dozen measures failed to curb a home price surge across Asia’s fourth-largest economy.

The BOK has been at the forefront of global stimulus withdrawal with a focus on reining in financial imbalances with household debt hitting 1.85 quadrillion won ($1.55 trillion) in the third quarter.

Price pressures

The BOK also on Thursday raised its inflation outlook for next year to 2.0% from 1.5% previously, suggesting the need for further rate hikes amid concerns about faster and more protracted price pressures.

The three-year treasury bond futures rose as much as 0.14 points after the bank released its revision of forecasts, while the benchmark KOSPI and the won fell.

Consumer inflation accelerated to a near decade high in October and the economy grew 4.0% in the third quarter, thanks to robust exports of chips and petrochemical products and flattered by comparisons to last year’s pandemic slump.

The bank still sees the economy growing 4% this year and 3% in 2022, as projected in August.

Mounting price pressures and firm growth have prompted most analysts polled by Reuters to bring forward their forecasts. Analysts now see the interest rate reaching 1.25% in the first quarter and 1.50% by end-2022.

One complication to that is a recent spike in daily Covid-19 cases, which reached over 4,000 for the first time on Wednesday, clouding the outlook for the months ahead.

The BOK in August became the first major Asian central bank to start raising borrowing costs since the Covid-19 pandemic started.

New Zealand on Wednesday raised interest rates for the second time in two months and the U.S. Federal Reserve is expected to switch to tightening to contain price pressure.

Source: https://www.cnbc.com/2021/11/25/south-korea-raises-interest-rates-as-inflation-household-risks-grow.html