Soaring home prices have become a thorny political issue for Korea’s government, facing a frustrated and angry middle class.
By Wolf Richter for WOLF STREET.
With its rate hike of 25 basis points today, to 0.75%, the Bank of Korea became the second central bank of a developed economy to hike its policy rate in this cycle. The first was Iceland, whose central bank hiked its policy rate on Wednesday by 25 basis points to 1.25%, after having already hiked it in May. These timid rate hikes follow the serial shock-and-awe rate hikes by the central banks in Russia and Brazil, among others, that started in the spring.
The statement and the comments by Bank of Korea governor Lee Ju-yeol had a hawkish bent, pointing at further rate hikes in the future, specifically to tamp down on financial imbalances, surging household debt, and soaring home prices.
The soaring home prices have become a thorny political issue for the government, facing a frustrated and angry middle class.
Despite the rate hike, financial conditions “remain accommodative,” the BoK governor said, with the policy rate being well below the rate of inflation.
“We are seeing some side effects from the unusually loose conditions of the past year-and-a-half, so we will normalize interest rates in accordance with the economic recovery,” he said.
“As for timing for the further hikes, we will consider how the COVID-19 situation plays out, and changes in the Fed’s policy stance, which would have an important impact for us, as well as how the financial imbalances play out,” he said.
The Reserve Bank of New Zealand, under pressure from the government to do something about the raging housing bubble, had already ended QE cold-turkey in July, and was also expected to hike its policy rate (currently 0.25%) at the August meeting. But on August 17, hours before the expected rate hike, the government imposed a snap lockdown due to some Covid infections. And the RBNZ decided to delay the rate hike.
A week later, RBNZ’s Assistant Governor Christian Hawkesby told Bloomberg that “a 50-basis point move was definitely on the table in terms of the options that we actively considered.” And he said that future policy decisions “aren’t going to be tightly linked to COVID and whether we’re in lockdown or not.” Expectations are now for a 50-basis point rate hike at the next meeting in October.
This drama over 25-basis point and 50-basis point rate hikes, or any rate hikes, in the developed economies comes after some shock-and-awe rate hikes in the emerging markets.
The Bank of Russia hiked its policy rate in series, from 4.25% in March to 6.5%, including a 100-basis point hike on July 23. The central bank of Brazil hiked its policy rate in four steps, starting in March from 2% to 5.25%, including a 100-basis point hike on August 4. The central bank of Turkey hiked its policy rate in massive leaps to 19% by March, upon which the governor of the central bank was sacked. But the policy rate has remained at 19%.
What these countries are facing is the same thing that the US economy is facing: large scale inflation that is threatening to come unhinged.
Central banks that are engaging in QE, such as the US, the ECB, the Bank of Japan, the Bank of England, the Bank of Canada, etc. will not hike rates until after they end their asset purchases. This has been spelled out many times, and that’s how it happened last time.
Asset purchases are designed to push down long-term rates, and rate hikes are designed to push up short term rates. By engaging in both simultaneously, a central bank would simultaneously stimulate with lower long-term yields and remove stimulus with higher short-term yields. In addition, pushing up short-term yields and pushing down long-term yields simultaneously would cause the yield curve to flatten and possibly invert.
In those countries, rate hikes have to wait until after QE has ended. There is now quite a bit of pressure in the US to end QE, and Fed governors are lining up behind it, and “sooner rather than later” is the new motto. The Bank of Canada has already trimmed its QE to near nothing, as has Japan.
The Bank of England announced in May that it would reduce its weekly bond purchases. The Riksbank of Sweden said in April that it would stick to its plan to end QE entirely by late 2021. The Reserve Bank of Australia announced in July that it also would reduce its weekly bond purchases. After the asset purchases have ended, the central banks can contemplate rate hikes.
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