The Bank of Japan raised its benchmark interest rate by 0.25 percentage point Tuesday, from the current 0.75% to 1%. It marks the first time Japan's benchmark rate has entered the 1% range in 31 years, since September 1995. The Bank of Japan, which had been cautious about rate increases over concerns about an economic slowdown, raised the benchmark rate again after just six months due to inflationary pressure accumulated in the aftermath of the war in Iran. The same day, the Bank of Japan signaled it would maintain its rate-hiking stance for the time being, stating that it "will continue to raise the policy rate and adjust the degree of monetary easing in line with economic, price, and financial conditions."
Although the United States and Iran agreed to end the war, global inflationary pressure continues amid the fallout from the 106-day conflict. Ahead of Japan's rate hike, the European Central Bank (ECB) also raised its benchmark rate by 0.25 percentage point on Friday, becoming the first among the Group of Seven (G7) nations to do so. ECB President Christine Lagarde said in a media interview Sunday that "the surge in energy prices caused by the war is already pushing up prices across the board." The U.S. Federal Reserve is expected to hold its benchmark rate at its monetary policy meeting Monday and Tuesday, sending a signal of monetary tightening to the market despite pressure from President Donald Trump.
Korea must squarely face the reality that global tightening is gaining full force as central banks of major advanced economies raise rates one after another. While Korea's economic growth forecast for this year has been revised upward to 2.6% and the KOSPI has surpassed 8,700, this is no time to be intoxicated by optimism. Moreover, the "three highs" risk of high prices, high exchange rates, and high interest rates is spreading to the real economy. The import price index for May, released by the Bank of Korea on Tuesday, rose 24.8% from the same month a year earlier, the highest level since July 2022, putting price management on alert. Concerns are growing that rising import raw material prices will stimulate domestic consumer prices going forward.
The government and financial authorities must build a sturdy breakwater to defend against the fierce waves of global tightening. Above all, it is important to preemptively manage real economy risks and stabilize people's livelihoods so that our economy is not swept away by the surge of the three highs. In addition, they must thoroughly prepare for the possibility of household debt defaults that could arise if the Bank of Korea raises rates, as well as the shock to the stock market and exchange rate.
