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Monetary policy

Bank of Korea governor sends stronger signal to raise rates this year

With vaccination rates accelerating in Korea, some economists betting on fourth-quarter rate hike

By Jun 11, 2021 (Gmt+09:00)

Bank of Korea Gov. Lee Ju-yeol
Bank of Korea Gov. Lee Ju-yeol

South Korea’s central bank governor on Friday flagged a tighter monetary policy for the second time in less than a month, fueling expectations that the bank will raise rates earlier than expected, possibly in the fourth quarter.

In a speech marking the Bank of Korea’s 71st anniversary, Gov. Lee Ju-yeol said, “if the economy is expected to sustain a solid recovery, the current accommodative policy should be normalized in an orderly manner at an appropriate time.”

“The BOK will fully communicate with market players in advance to minimize any shock and help them prepare.”

He said the BOK will closely monitor developments with regards to the COVID-19 pandemic, the pace of an economic recovery and risks linked to financial imbalances before it takes action.

Apparently affected by his hawkish comments, short-term bond prices tumbled on Friday, with the one-year government bond yield rising 4.1 basis points to 0.76%.

In recent weeks, Korea’s central bankers voiced a tightening monetary bias after the BOK kept its base rate at a record 0.5% during a rate review on May 27.

The central bank stood pat at 0.5% since a quarter-percentage-point cut in May 2020 and a 0.75 percentage point reduction in January last year to counter a pandemic-caused economic slowdown.

‘A RATE HIKE OR TWO DOESN’T CONSTITUTE TIGHTENING’

A senior BOK official said on Friday the current policy rate is “significantly low and a rate hike or two doesn’t constitute monetary tightening.”

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

On Friday, he said the strength of Korea’s economic recovery will be more pronounced in the second half of this year.

Some economists bet on a rate hike in the fourth quarter.
Some economists bet on a rate hike in the fourth quarter.

While keeping its rate steady at the May review, the central bank 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%, proof that the local economy is on track toward fast growth.

Under the most optimistic of circumstances, the BOK said growth could reach 4.8% this year if the pace of vaccination accelerates.

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

Q4 HIKE LIKELY GIVEN HOUSEHOLD DEBT, INFLATION

The BOK has expressed concerns over mounting household debt amid ultra-low borrowing costs.

Latest data showed Korean households and companies have taken out fresh loans worth 208 trillion won ($189 billion) from banks last year, pushing the outstanding debt balance and the annual debt-increase rate to record highs.

Banks’ outstanding balance of combined household and company loans stood at 1,965.2 trillion won ($1.8 trillion) at the end of 2020.

Bank of Korea governor sends stronger signal to raise rates this year

Most analysts previously expected the BOK to start tightening its policy next year at the earliest to continue to support the country’s growth momentum, though some recently forecast that the bank will raise rates in the fourth quarter of this year.

Further tightening to raise the BOK’s policy rate to 1% is also possible before Gov. Lee ends his term at the end of March next year, according to some economists.

South Korea’s exports in May expanded by the most in more than three decades, while inflation accelerated to a nine-year high and topped the central bank’s 2% target for two straight months.

Write to Ik-Hwan Kim at lovepen@hankyung.com

In-Soo Nam edited this article.

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