Lee hints at tightening of policy

Lee Ju-yeol

Bank of Korea Governor Lee Ju-yeol hinted at the possible of tightening Korea’s monetary policy despite the fact the inflation rate remains low.

“Even if inflation remains low, if the economy shows a steady recovery in the mid-terms, we will consider readjusting [the loose monetary policy].” said Lee during a press conference on Saturday.

“[Federal Reserve Chairwoman Janet] Yellen said if the policy rate is not raised, it will later lead to an inflation problem and this could affect financial stability,” Lee continued. “We agree with [Yellen’s] statement that] holding the monetary policy until inflation reaches 2 percent is imprudent.”

The central bank governor’s comment came at a time when advanced economies including the U.S. and Europen Union have been tightening monetary policies that were loosened after the global financial meltdown nearly a decade ago.

During its latest meeting on Sept. 19 and Sept. 20, the U.S. central bank decided to reverse its stimulus starting next month by selling some of its $4.5 trillion in holdings, mostly treasuries and mortgage-backed securities.

While the FOMC did not raise interest rates in the last meeting, the market forecast that an interest rate hike is imminent after Yellen said the Fed “should also be wary of moving too gradually [on interest rates].”

This has led to the possibility of the Fed raising rates at its December meeting.

The European Central Bank has been taking similar actions. On Sept. 7, ECB president Mario Draghi hinted at changes in its own quantitative easing program.

Draghi said considering the complexity of quantitative easing programs and the risks that come with changes, the central banks would be cautious about giving specific dates. But he said, “Probably the bulk of these decisions will be taken in October.”

Korea has also adopted a loose monetary policy since the global meltdown and in June 2016 lowered the key interest rate to an all-time low of 1.25 percent.

But since the Moon Jae-in administration took office in May, there has been growing speculation about the BOK making changes to the interest rates, particularly since the new government wants to curb household debt, which is at a record level.

The Moon administration has announced real estate limiting fresh loans and is working on a household debt policy that is scheduled to be announced later this month.

“Despite the Aug. 2 [real estate] measure, the rate at which household loans are growing is relatively faster than in the past,” Lee said. “Since the government and the oversight authorities will be releasing comprehensive household debt management measures, we will have to wait and see their effects.”

When asked about a currency swap arrangement between South Korea and China that expires on Oct. 10, Lee said the Korean authorities are in negotiations with the Chinese.

“We hope we can reach a conclusion as early as possible and I think it would be the same for the People’s Bank of China,” Lee said.

China has the largest currency swap deal with South Korea at $56 billion.

However, recent tensions between the two countries over the deployment of the U.S. antimissile defense system have raised the possibility that the currency swap may come to an end at some point.

Although Korea’s foreign reserves are enough to counter any foreign currency crisis, the currency swap arrangement signifies stronger economic cooperation with a country.

The BOK Governor also raised concerns over rising geopolitical tensions and their possible impact on the South Korean financial markets and the real economy.

“Risks from North Korea have risen since North Korea’s nuclear test on Sept. 3 and the ballistic missile launch on Sept. 15 that resulted in a resolution by the United Nation including international sanctions and the ongoing dispute between North Korea and the U.S.,” Lee said.

“The volatility of the financial market recently has gone up but when looking at indicators, it doesn’t seem to have spilled over to the real economy.”

However, Lee said the BOK is on the alert for possible negative impacts on the South Korean economy including weakening consumer sentiments.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]