On November 30th, The Bank of Korea (BoK) voted to raise the base rate for the first time since May 2011. It was increased by 25 basis points from a record low of 1.25%. The Board judged it the right time to begin the process of policy normalisation with inflation comfortably within the BoK’s target range and GDP growing at the fastest pace for over six years in Q3 this year, at 1.4%.
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As we have informed our clients previously, adopting ultra-loose monetary policy can do more to hinder than help the supply side of an economy. Unprofitable firms with weak or non-existent productivity growth are kept alive.
Indeed, South Korea’s labour productivity has stagnated in both the manufacturing and service sectors since the beginning of the loosening cycle in 2012. Raising interest rates considerably above the zero-bound is the policy response Fathom would prescribe for South Korea, along with the rest of the developed world. But, with the real South Korean base rate at such low levels, there is still a way to go.
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