Bank of Korea tilting toward monetary tightening

Bank of Korea Governor Lee Ju-yeol hits a gavel during the latest monetary policy board meeting at its headquarters in Seoul, May 27. Yonhap

Minutes show some board members recommend key rate hikes

By Lee Min-hyung

The Bank of Korea (BOK) is repeatedly signaling an end to its year-long freeze in the key interest rate, as a post-pandemic economic recovery ― propelled by an export rebound ― becomes more visible.

According to minutes from the latest BOK monetary policy board meeting, some members expressed the opinion that the central bank needs to send a cue for hiking the benchmark rate to keep inflation and rising household debt under control.

“Given the future course of the economy and price levels, it is time for the BOK to consider adjusting its easing stance in monetary policy,” one board member said during the May 27 rate-setting meeting.

After the BOK cut the key rate to a record low of 0.5 percent in May 2020, the central bank maintained a dovish stance by freezing it.

And it was not until recently that the bank hinted at the possibility of increasing the rate, with BOK Governor Lee Ju-yeol calling for the need to “normalize its monetary easing policy.”

“We will determine how and when to adjust the monetary policy sometime in the second half of this year,” Lee said last week in a speech marking the BOK’s 71st anniversary.

He did not specify any other details, but underlined the need for the rate hike on expectations that the economy will maintain its solid recovery momentum throughout 2021.

Lee remained ultra-dovish until the April 15 rate-setting meeting by declining to comment on the timing of the possible rate hike, but started taking a hawkish stance after the May 27 meeting on the rosy outlook for an economic rebound here in the latter half of the year.

In May, the central bank and a group of global financial institutions revised Korea’s 2021 GDP growth forecast up to the 3 percent to 4 percent range on export growth and rising consumption that had been stifled by the year-long COVID-19 lockdown.

Bank of Korea Deputy Governor Park Jong-seok also shared his view that the central bank’s key rate remained at a “considerably low” level.

“The current key rate is at the historic low of 0.5 percent, so it is hard for us to say that raising the interest rate once or twice, in line with any changes in price levels and financial stability circumstances, means a tightening of monetary policy,” he told reporters last week.

Hana Financial Investment analyst Lee Mi-seon expects the central bank will increase the key rate as early as October this year.

“We will be able to determine whether the economy will achieve 4 percent growth by the end of September, and if so, the BOK will likely raise the rate sometime in October or November,” he said.

The seven-member monetary policy board will hold the next rate-setting meeting on July 15.