Bank of Korea governor flags rate hike as economy improves

South Korea’s central bank governor on Thursday flagged a possible policy rate hike before the end of the year as the domestic economy recovers at a faster-than-expected pace and financial risk from massive household debt mounts.

In his most hawkish comment since the start of the COVID-19 pandemic last year, Bank of Korea Gov. Lee Ju-yeol said the central bank should not hurry in monetary tightening, but at the same time “must not miss the right time to do so.”

“It is an important task to adjust monetary policy in an orderly manner in line with the change in the real economy and financial market conditions,” Lee said at a media briefing after the BOK’s rate review committee kept the base rate steady at a record low of 0.5% earlier in the day.

He said it is natural for the BOK to pull back monetary easing measures taken earlier to "an unprecedented level” aimed at countering the pandemic.

Analysts said the governor was sending a signal that the market needs to prepare for a rate hike as early as this year, although he warned against a hasty increase, saying tightening depends on “the pace of (economic) recovery.”

His remarks came on the same day that the BOK raised its growth outlook for this year to 4% from a February estimate of 3% and its inflation projection to 1.8% from 1.3%.

SOME BETTING ON RATE HIKE IN OCTOBER OR NOVEMBER

Under the most optimistic of circumstances, growth could reach 4.8% this year if the pace of vaccinations accelerates, according to the BOK. In the worst-case scenario, local economic growth will remain at 3.4%, it said.

Exports and strong investment have led Korea’s economic expansion so far this year, lifting confidence and promoting a flurry of outlook upgrades from analysts.

Some economists say the central bank may be tempted to raise its policy rate in October or November after watching the US Federal Reserve’s moves with regard to tapering (slowdown of central bank asset purchases) to absorb market liquidity.

On Thursday, Gov. Lee reiterated that the BOK will keep its policy accommodative, but said it will pay “closer attention to the build-up of financial imbalances, including ballooning household debt.”

The central bank kept its benchmark interest rate unchanged at 0.5% since a quarter-percentage-point cut in May 2020 and a 0.75 percentage point reduction in January last year.

Write to Ik-Hwan Kim at lovepen@hankyung.com
In-Soo Nam edited this article.