BOK chief hints at possible rate increase

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BOK chief hints at possible rate increase

The head of Korea’s central bank on Monday hinted at the possibility of an interest rate increase for the first time in a year, citing economic recovery from brisk exports and a new fiscal spending plan under President Moon Jae-in, who was elected last month.

“It’s necessary to keep the current monetary easing policy due to uncertainties from both domestic and abroad,” Lee Ju-yeol, governor of the Bank of Korea, said at an event celebrating the bank’s 67th anniversary in Seoul. “However, should it become more conspicuous that economic conditions will continue to improve, we may need to adjust the degree of monetary easing.”

This is the first time since the Bank of Korea brought the key rate to a record-low 1.25 percent last June that it has suggested a turnaround in its monetary policy. Lee referred to various factors including robust exports and expanded government spending under President Moon, who has vowed to make jobs his main policy focus.

“We expect this trend to continue and the rate of economic growth to surpass the outlook set in April,” Lee said. The Bank of Korea set the 2017 estimate for gross domestic product growth at 2.6 percent in April, up 0.1 percent from January.

“The rate of growth will increase even further once the new government carries out its fiscal policy set to create jobs,” the governor added.

Lee’s remark raised speculation that the central bank might raise rates later this year. Seo Hyang-mi, a fixed-income strategist at HI Investment and Securities, cautioned against jumping to conclusions too quickly, saying that Lee’s statement “meant the Bank of Korea will adjust the degree of easing when it is certain that economic recovery in Korea is apparent, rather than a signal for an immediate raise.”

Seo added the bank might rely on other methods, including reducing the supply of liquidity in the market, rather than increasing the rate.

Lee’s statement came just before the U.S. Federal Reserve will convene its June Federal Open Market Committee meeting slated to run from Tuesday to Wednesday. The U.S. Fed is poised to raise its own rates during the meeting from between 0.75 and 1 percent to between 1 and 1.25 percent.

Although Lee vowed in May that the bank would not “mechanically” raise its rates in line with the U.S. Fed, some local analysts suggest the central bank can no longer ignore the continuous rate hikes at the Fed, especially given the recent influx of foreign investment in the Korean market. “Still,” said Seo at HI Investment, “this does not mean the Bank of Korea is obliged to follow the Fed’s decision.”

The analyst suggested the market was not ready for a sudden rate increase given issues like rising household debt in Korea. “The bank seems to be giving the signal to the market so it can be prepared,” she said.

Korean household debt, which has reached nearly 1,360 trillion won ($1.21 trillion) as of May, is a ticking bomb for the local economy. Higher interest rates mean higher debt, which could force many Korean households to default on their loans.

Kim Dong-yeon, the new deputy prime minister for the economy and minister of finance, will meet with Governor Lee today at the Bank of Korea’s headquarter in central Seoul, to discuss fiscal and monetary policy under the new administration.

This is the first time since April 2014 that a finance minister has visited the central bank.

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