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| Bank of Korea Governor Lee Ju-yeol speaks during a press conference after holding a monetary policy board meeting at the central bank’s headquarters in Seoul, Thursday. Yonhap |
By Lee Min-hyung
Bank of Korea (BOK) Governor Lee Ju-yeol sent a signal Thursday of a possible interest rate hike to come no later than the end of 2021 due to reviving momentum for a post-coronavirus economic recovery.
“The possible rise in the benchmark rate will be determined by how much the economy will recover throughout this year,” Lee told reporters during an online press conference. “The Korean economy appears to gain stronger recovery momentum and prices will be on the rise, but we are going to maintain our monetary easing stance due to lingering uncertainties surrounding the spread of COVID-19.”
This is the first time since the outbreak of the coronavirus last year that the central bank chief has hinted at a possible rate hike. For the past year, Lee maintained an “ultra-careful stance” on the adjustment of the benchmark rate and placed more emphasis on reviving the economy by maintaining the near-zero interest rate.
But with the economy showing gradual signs of recovery on the back of an export rebound and expanded stimulus packages, the BOK also revised up Korea’s GDP growth forecast to 4 percent in 2021, up by 1 percentage point from its earlier projection released in February.
The central bank also expected the Korean economy to achieve 3 percent growth next year, up 0.5 percentage points from the previous forecast.
Unsurprisingly, the BOK’s monetary policy board also froze the benchmark rate at 0.5 percent on the same day. Lee said the BOK could raise the key rate faster than the U.S. Federal Reserve.
“The Fed’s monetary policy casts an enormous impact on the Korean economy, but Korea’s monetary policy should be adjusted in line with domestic economic circumstances,” he said. The BOK will decide on the rate adjustment following comprehensive consideration of how much and how fast the economy grows here in accordance with the pace of vaccination.”
He also made it clear that the BOK will not necessarily delay the possible interest rate hike until the Fed takes a similar action, as such a belated move may lead to side effects for the local economy ― such as worsening financial inequality.
Regarding calls for the BOK to notify the timing of its rate hike in advance to limit the impact on the financial market, the BOK chief said: “I’ve acknowledged this.”
“Because the Fed’s monetary policies have a greater impact on the local financial market, the Fed’s monetary policies are an important consideration when it comes to deciding the bank’s monetary policy. But it’s very true that the country’s monetary policy should be decided based on the condition of the local economy,” he said.
Korea University economist Kim Jin-ill, who had also worked at the Federal Reserve Board, said the pace of vaccinations here will be the biggest factor determining the BOK’s future monetary policy.
“The Fed’s monetary policy will have less impact on the BOK’s possible rate hike,” he said. “The point lies in how fast the economy recovers in line with the pace of vaccination.”
Yonsei University economist Sung Tae-yoon said the central bank will not be able to raise the key rate unless offline consumption bounces back to pre-pandemic levels.
“The economy is on track for a recovery, but it still relies heavily on exports, while offline consumption remains sluggish,” he said.
Separately, the BOK chief retained his “quite negative” stance toward cryptocurrencies. “The size of the cryptocurrency market is expanding rapidly and the bank is well aware of the estimated negative impact from the market’s expansion. Because virtual assets have high price volatility, it’s possible that these assets could negatively influence the stability of the financial system.”
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