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Central bank hints at rate hike, raises growth forecast to 4%
BOK takes cautious, yet more hawkish stance toward rate hike by the end of the year
By Jung Min-kyungPublished : May 27, 2021 - 16:00
South Korea’s central bank on Thursday took a more hawkish stance toward an interest rate hike by the end of the year, while upgrading its economic outlook for this year to 4 percent.
In a briefing tied to a monetary policy meeting held earlier in the day, Bank of Korea Gov. Lee Ju-yeol hinted that the policy board has discussed the possibility of a policy shift.
“If the economic situation improves, then there is a need to adjust the measures in line with the situation,” Lee said.
“The BOK should not only focus on normalization and is considering the side-effects of delayed decisions.”
The possible interest rate hike by the end of year depends on economic progress, Lee noted, stressing that the BOK will make its own decision, though the US Federal Reserve’s monetary policy change will be factored in.
“A policy decision that only follows the steps of the US Fed could worsen financial imbalance,” the BOK chief said.
“The US Fed’s decision will be a key factor, but the BOK doesn’t manage its monetary policy by merely keeping the same pace as our US counterpart.”
Experts project the BOK to raise its interest rate in the fourth quarter of this year or in the first three months of next year.
“The US is likely to start discussing tapering of the central bank’s assets purchases soon,” said Lee In-ho, an economics professor at Seoul National University.
“The US Fed is likely to carry out a rate hike in the second half of the year, leading the BOK to mirror the move by at least the fourth quarter,” he added.
Others said that with Lee’s term set to end in March next year, a rate hike is likely to be carried out before that.
Buoyed by an accelerated recovery in exports, the BOK raised its 2021 economic growth forecast by 1 percentage point, while keeping its benchmark policy rate frozen at a record low of 0.5 percent.
The BOK on Feb. 25 forecast Asia’s fourth-largest economy to grow 3 percent this year. Lee said in April that an annual growth of a mid-3 percent range was possible for Korea.
The nation’s exports jumped 53.3 percent on-year to $31.1 billion in the first 20 days of May, compared with $20 billion the previous year, data from the Korea Customs Service showed.
According to Lee, the robust 4 percent growth is based on the best case scenario that the nation’s vaccination rate speeds up by the end of the year and the economic sentiment recovers faster-than-expected. Only 7.7 percent of Korea’s 52 million population have received a first shot of a COVID vaccine as of Wednesday, according to the nation’s health authorities.
“The uncertainties with vaccination and COVID-19 pandemic remains,” Lee told reporters.
“The vaccination will work as a key factor in determining the speed of recovery for our economy,” he added.
The BOK noted a growth in inflation expectations and raised its inflation outlook for this year by 0.5 percentage point to 1.8 percent.
Korea’s consumer prices grew 2.3 percent on-year in April, sparking inflation fears, and the figure is projected to further move in an upward trend in May, according to Lee. But the BOK expects the momentum to slow down starting in the second half of the year, he added.
The BOK has maintained its base rate at 0.5 percent since May last year, holding it at a record-low level for a year, to minimize economic woes stemming from the COVID-19 pandemic.
President Moon Jae-in recently said the economy could expand more than 4 percent this year and pledged to boost fiscal spending if needed, for a job market recovery.
(mkjung@heraldcorp.com)
In a briefing tied to a monetary policy meeting held earlier in the day, Bank of Korea Gov. Lee Ju-yeol hinted that the policy board has discussed the possibility of a policy shift.
“If the economic situation improves, then there is a need to adjust the measures in line with the situation,” Lee said.
“The BOK should not only focus on normalization and is considering the side-effects of delayed decisions.”
The possible interest rate hike by the end of year depends on economic progress, Lee noted, stressing that the BOK will make its own decision, though the US Federal Reserve’s monetary policy change will be factored in.
“A policy decision that only follows the steps of the US Fed could worsen financial imbalance,” the BOK chief said.
“The US Fed’s decision will be a key factor, but the BOK doesn’t manage its monetary policy by merely keeping the same pace as our US counterpart.”
Experts project the BOK to raise its interest rate in the fourth quarter of this year or in the first three months of next year.
“The US is likely to start discussing tapering of the central bank’s assets purchases soon,” said Lee In-ho, an economics professor at Seoul National University.
“The US Fed is likely to carry out a rate hike in the second half of the year, leading the BOK to mirror the move by at least the fourth quarter,” he added.
Others said that with Lee’s term set to end in March next year, a rate hike is likely to be carried out before that.
Buoyed by an accelerated recovery in exports, the BOK raised its 2021 economic growth forecast by 1 percentage point, while keeping its benchmark policy rate frozen at a record low of 0.5 percent.
The BOK on Feb. 25 forecast Asia’s fourth-largest economy to grow 3 percent this year. Lee said in April that an annual growth of a mid-3 percent range was possible for Korea.
The nation’s exports jumped 53.3 percent on-year to $31.1 billion in the first 20 days of May, compared with $20 billion the previous year, data from the Korea Customs Service showed.
According to Lee, the robust 4 percent growth is based on the best case scenario that the nation’s vaccination rate speeds up by the end of the year and the economic sentiment recovers faster-than-expected. Only 7.7 percent of Korea’s 52 million population have received a first shot of a COVID vaccine as of Wednesday, according to the nation’s health authorities.
“The uncertainties with vaccination and COVID-19 pandemic remains,” Lee told reporters.
“The vaccination will work as a key factor in determining the speed of recovery for our economy,” he added.
The BOK noted a growth in inflation expectations and raised its inflation outlook for this year by 0.5 percentage point to 1.8 percent.
Korea’s consumer prices grew 2.3 percent on-year in April, sparking inflation fears, and the figure is projected to further move in an upward trend in May, according to Lee. But the BOK expects the momentum to slow down starting in the second half of the year, he added.
The BOK has maintained its base rate at 0.5 percent since May last year, holding it at a record-low level for a year, to minimize economic woes stemming from the COVID-19 pandemic.
President Moon Jae-in recently said the economy could expand more than 4 percent this year and pledged to boost fiscal spending if needed, for a job market recovery.
(mkjung@heraldcorp.com)
