BOK chief signals rate hike within this year

Governor Lee expects mid-term inflation woes to deepen

Bank of Korea (BOK) Governor Lee Ju-yeol said Thursday that the central bank will carry out its first post-pandemic rate hike within this year in a preemptive move to reduce a financial imbalance and keep inflationary pressure under control.

“It is necessary to normalize monetary policy in an orderly manner some time not too late this year,” Lee said during a press briefing at the BOK headquarters in Seoul.

This is a clearer and stronger signal compared to his previous stance that the pandemic-induced emergency expansionary monetary policy would need an “orderly, gradual drawdown,” with the pace of the policy adjustment to be determined by the degree of economic recovery from the COVID-19 pandemic.

Also strengthening the case for the earlier-than-expected rate hike are mid-term inflation woes, as illustrated by a steeper rise in the prices of goods and services that tend not to fall once they spike.

This is why Lee does not consider the rate hike as a hawkish move but a normalization from the record-low interest rate of 0.5 percent put in place to ward off economic recession last year.

The need to adjust monetary policy is increasing, in his view, since cheaper borrowing costs have found their way mostly into the financial market with household debt rising steeply.

“The Bank of Korea’s mandate is for stability in prices and interest rates, but if we neglect to keep the financial imbalance under control, the economy and prices will, over time, be negatively affected in the medium term,” he said.

There has been growing concern over the financial imbalance due to snowballing household debt and asset price bubbles as a result of the record-low interest rate.

Lee dismissed the criticism that fiscal and monetary policies were not being coordinated, as indicated by the Ministry of Economy and Finance seeking to draw up about 30 trillion won ($26 billion) for another extra budget, while the central bank is signaling a rate hike.

“Monetary policy follows an assessment of the macroeconomic conditions of a country. It is therefore a step in the right direction for us to remove the undesirable secondary effects of the long-term low-interest rate, given the economy is showing strong signs of a recovery.”

An efficient policy mix between the two financial authorities can be achieved by targeted fiscal spending to help the most affected income groups and industries, a measure that must entail continued efforts to grant greater state financial resources to increase productivity.

The current negative GDP (Gross Domestic Product) gap will, Lee added, rapidly narrow and turn positive as early as the latter half of this year, if current economic growth stays uninterrupted.

A GDP gap is a difference between a country’s real GDP and potential GDP. A negative gap means the country’s economy is underperforming its growth potential; while a positive gap means vice versa.

“The gap will turn positive, if the county’s growth outpaces the previously projected figures for the economic outlook,” Lee said.

However, Seoul National University economist Lee In-ho said a BOK rate hike within this year is not at all a foregone conclusion, since a U.S. Federal Reserve rate hike remains a missing variable.