Soaring house prices have become a thorny political issue for the Korean government, in the face of a frustrated and angry middle class.
By Wolf Richter for WOLF STREET.
With its 25 basis point rate hike today to 0.75%, the Bank of Korea has become the second central bank in a developed economy to raise its policy rate in this cycle. The first is Iceland, whose central bank on Wednesday raised its key rate by 25 basis points to 1.25%, after having already raised it in May. These timid rate hikes follow serial rate hikes by central banks in Russia and Brazil, among others, that began in the spring.
Bank of Korea Governor Lee Ju-yeol’s statement and comments had a hawkish bent, pointing to further rate hikes in the future, especially to alleviate financial imbalances, rising household debt and soaring house prices.
Soaring house prices have become a thorny political issue for the government, in the face of a frustrated and angry middle class.
Despite the rate hike, financial conditions “remain accommodative,” the BoK governor said, with the key rate well below the rate of inflation.
“We are seeing side effects from the unusually relaxed conditions of the past year and a half, so we will normalize interest rates based on the economic recovery,” he said.
“With respect to the timing of the further hikes, we will be looking at how the COVID-19 situation has developed and changes in the direction of Fed policy direction, which would have a significant impact for us, as well as how financial imbalances, ”he said. noted.
The Reserve Bank of New Zealand, under pressure from the government to do something about the raging housing bubble, had already ended cold QE in July and was also due to raise its key rate (currently 0.25%) at the August meeting. But on August 17, hours before the expected rate hike, the government imposed an instant lockdown due to some Covid infections. And the RBNZ decided to delay the rate hike.
A week later, RBNZ Deputy Governor Christian Hawkesby told Bloomberg that “a 50 basis point move is definitely on the table in terms of options that we have been actively considering.” And he said future political decisions “will not be closely tied to COVID and whether we are locked out or not.” We now expect a rate hike of 50 basis points at the next meeting in October.
This drama about 25 and 50 basis point rate hikes, or any rate hikes, in developed economies comes after shocking and frightening rate hikes in emerging markets.
The Bank of Russia raised its key rate series from 4.25% in March to 6.5%, including a 100 basis point hike on July 23. Brazil’s central bank raised its key rate in four stages, starting in March by 2%. at 5.25%, including a 100 basis point hike on August 4. Turkey’s central bank hiked its policy rate by massive jumps to 19% in March, after which the central bank governor was sacked. But the key rate remained at 19%.
What these countries are facing is the same thing the US economy is facing: large-scale inflation that threatens to derail.
Central banks that engage in quantitative easing, such as the United States, the ECB, the Bank of Japan, the Bank of England, the Bank of Canada, etc. will only raise their rates after they have ended their asset purchases. This has been explained many times, and this is how it was the last time.
Asset purchases are designed to lower long rates, and the rate hikes are designed to drive up short-term rates. By engaging in both simultaneously, a central bank would simultaneously boost with lower long-term yields and remove the stimulus with higher short-term yields. Moreover, pushing short-term yields and long-term yields lower simultaneously would cause the yield curve to flatten and invert.
In these countries, rate hikes must wait until the end of QE. There is now quite a bit of pressure in the US to end QE, and Fed Governors are lining up, and “sooner rather than later” is the new currency. The Bank of Canada has already cut its QE to next to nothing, as has Japan.
The Bank of England announced in May that it would reduce its weekly bond purchases. Sweden’s Riksbank said in April that it would stick to its plan to end QE entirely by the end of 2021. The Reserve Bank of Australia announced in July that it would also cut its weekly bond purchases. Once asset purchases are complete, central banks may consider rate hikes.
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