BOK governor nominee stokes slower rate hike expectations

South Korea’s nominee for its new central bank governor stoked expectations that the Bank of Korea may raise interest rates less than predicted as he said worries about both growth and inflation were increasing.

"Concerns that inflation and economic risks at home can intensify simultaneously are mounting as uncertainty in external conditions heightens," said veteran International Monetary Fund official Rhee Chang-yong in a statement on Thursday issued through the BOK, a day after South Korea nominated him.

Rhee said China’s economy, South Korea’s top export market, was more likely to slow down on the resurgence in the Omicron variant of the COVID-19 when the US Federal Reserve is accelerating the normalization of its monetary policy. He also mentioned the uncertainty surrounding the war in Ukraine.

OUTGOING GOVERNOR’S STRESS ON FIGHT AGAINST INFLATION

His remarks compared with the outgoing Governor Lee Ju-yeol’s hawkish stance. He has been stressing that the BOK needs to raise interest rates further to curb inflation, which is expected to hit an 11-year high in 2022.

“It is desirable to adjust easier monetary policy as inflation is expected to stay high for a considerable period and we need to cut risks of the financial imbalance,” Lee said on Feb. 24 when he chaired his last rate-setting meeting. His term ends on March 31.

The BOK restored interest rates back to a pre-pandemic level of 1.25% in January with three hikes since August last year to curb rising inflationary pressure and household debt in Asia’s fourth-largest economy. The central bank was forecast to raise the base interest rate to up to 2% by the end of this year.

But the monetary authority may slow down its policy tightening once Rhee takes office, given his latest remarks, some analysts said.

“Rhee’s inauguration could be a factor of lower bond yields,” said Shin Earl, a fixed-income analyst at SK Securities. “Increase of the policy rate may not be large, given Rhee’s view that the aging is likely to hurt the dynamics of the private economy.”

Still, the nominee is likely to continue the BOK’s policy of further rate hikes to tackle growing inflationary pressure and household debt, other experts said.

“Continuous growth in (national and household) debt ratios due to growing liquidity could significantly affect financial markets in the future,” Rhee said in a media interview in January. “Korea needs to adjust the debt ratios through interest rate increases although it is difficult.”

Rhee, the current director of the IMF’s Asia and Pacific Department, intends to retire from the Washington-based lender of last resort in early April, according to the IMF.

Write to Ik-Hwan Kim at lovepen@hankyung.com
Jongwoo Cheon edited this article.