[Editorial] Raise the base rate to 2.75% and align it with expansionary fiscal policy

On the 16th, the Monetary Policy Board of the Bank of Korea raised the base rate by 0.25 percentage point, from 2.50% to 2.75%. It was the first increase in three years and six months, since January 2023. The rate could be raised again at least once before the end of this year. The country is now entering a full-fledged tightening cycle.
The highest value a central bank should pursue is price stability. At the same time, it must take domestic economic conditions into account when setting interest rates. Consumer price inflation has recently remained in the 3% range for several consecutive months. The sharp rise in global oil prices caused by the Middle East war is the main reason. If inflation and recession overlap, the economy could slip into stagflation. Fortunately, growth has improved this year, creating some room for a rate hike.
The Bank of Korea raised its forecast for this year's economic growth from 2.6% to 3.0%. Exports are showing record-breaking strength, and if the trend continues, the country could even reach the unprecedented milestone of $1 trillion. The current account surplus is also expected to rise sharply. Semiconductors are driving both exports and growth. The government is pursuing a strategy of boosting semiconductor competitiveness through large-scale investment while also trying to escape low growth.
However, the government's push for expansionary fiscal policy and the rate hike appear to be at odds at first glance. The Bank of Korea is trying to drain liquidity, while the government is trying to inject it, which seems contradictory. It is like a two-horse carriage in which one driver, representing fiscal policy, urges the horses to run faster with a whip, while the other, representing monetary policy, pulls the reins to slow them down.
A carriage pulled in that way is hard to keep on a straight path. Shin Hyun-song said, "It cannot necessarily be called a mismatch," but monetary and fiscal policy are most effective when they move in the same direction with consistency. Because the policy goals of the central bank and the government differ, this is a problem that can arise under any administration. For both the government and the central bank, securing both growth and price stability is an unavoidable task. The more reason, then, for more precise follow-up measures.
A tightening policy is needed to stabilize the exchange rate. The won–dollar exchange rate, which has hovered around 1,500 won, pushes up import prices and fuels domestic inflation. A weaker won may help exporters, but it raises costs for companies that import raw materials and worsens their business environment.
Raising rates to curb inflation also helps prevent capital outflows and attract foreign investment. With this move, the U.S.-Korea interest rate gap has narrowed to 1 percentage point. But it also works against domestic companies by making capital financing more expensive, which can dampen investment. It increases interest burdens for households as well, weighing on consumption and domestic demand.
In particular, companies with high debt ratios and industries already facing poor conditions could suffer even more. The government needs separate measures for heavily indebted small business owners, self-employed workers, and vulnerable individual borrowers. Low interest rates can expand household lending and fuel real estate prices. In that sense, some say this rate hike came too late.
The decision on the base rate must take into account a wide range of domestic and external conditions, as well as trends in neighboring countries. Major central banks, including the European Central Bank (ECB) and the Bank of Japan (BOJ), have recently raised rates one after another. Dozens of variables influence interest-rate decisions. If the timing or the size of a hike or cut is wrong, the economy can suffer. That is why the best possible effort is always needed to make the best possible choice.