BOK governor gives another rate hike hint

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BOK governor gives another rate hike hint


Bank of Korea Gov. Lee Ju-yeol, right, attends a meeting with heads of business lobbying groups at the Bank of Korea in downtown Seoul on Thursday. [YONHAP]

The governor of the country’s central bank sent another signal of a rate hike Thursday, emphasizing the need to curb imbalances in the financial sector.

“We need to address the accumulated financial imbalances in a gradual manner,” Gov. Lee Ju-yeol said in a breakfast meeting with heads of business lobby groups and economic research institutes.

The comment was meant to express concerns over growing debt levels after a decade of low-interest rates. Lee went on to note that the pace of debt-level growth has surpassed that of income growth, which increases financial imbalances. To make a sounder financial landscape, Lee emphasized more corporate investment.

“The country’s economic growth has been driven by exports, but corporate investment is still lacking,” he said.

Korea’s benchmark interest rate has stood at 1.5 percent for nine consecutive months since the central bank hiked it from a record-low 1.25 percent last November. That was the Bank of Korea’s (BOK) first rate hike in six and a half years.

Lee’s latest remarks indicate that the governor could increase the rate at the remaining monetary policy meetings for this year, which are set for October and November.

A widening rate gap with the United States could encourage a hike, according to analysts, since that gap could trigger capital flight of investment to the United States.

The U.S. Fed hiked its federal fund rate on Thursday 0.25 percentage points, to 2 to 2.25 percent, pushing U.S. rates 0.75 percentage points higher than the Korean base rate. The governor said last month that he would keep an eye on the increasing gap.

“[The BOK] will monitor capital inflows with more caution, given that the gap widened to 0.75 percent and the United States will continue to raise rates,” Lee said.

On top of those factors, top government officials including Prime Minister Lee Nak-yon and Land Minister Kim Hyun-mee implicitly advocated a rate hike in the past few weeks.

Analysts said that the performance of certain economy indicators could define the timing for any future hike.

“Considering the worsening condition in the job market, a rate hike in October would not be easy,” said Park Sang-hyun, an economist at Leading Investment & Securities.

“Still, indexes related to economic sentiment are improving and gross domestic product in the third quarter could outperform the second quarter,” he said.

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