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Bank of Korea's interest rate hike may come earlier than expected

Bank of Korea Governor Lee Ju-yeol has repeatedly hinted at raising the interest rate in the second half of this year amid signs of economic recovery. Korea Times file
Bank of Korea Governor Lee Ju-yeol has repeatedly hinted at raising the interest rate in the second half of this year amid signs of economic recovery. Korea Times file

By Yi Whan-woo

The Bank of Korea (BOK) is forecasted to raise its key interest rate earlier than expected, possibly in November, as signs of economic recovery are increasingly being witnessed, according to analysts, Friday.

The expectation has been growing as BOK Governor Lee Ju-yeol on Friday once again signaled a possible rate increase in the second half of this year.

"If the economy is expected to continue its solid recovery pace, we will have to normalize the current accommodative monetary policy in an orderly manner," Lee said in a speech to mark the 71st anniversary of the BOK's foundation.

Experts said that the possible increase is most likely to be 25 basis points, considering the U.S. Federal Reserve has yet to decide over whether to raise the interest rate there and also domestic household debt risks continue to pose challenges for the economy. The BOK's benchmark interest rate has been frozen at 0.5 percent since July 2020.

"I am on the same side with Governor Lee regarding issues on the interest rate, which I think is likely to be up by 0.25 percentage points," said Julia Kim, head of research and planning at Institute for Global Economics. "And I would go for somewhere between November and December if you ask when regarding timing of the hike."

She referred to Lee's commemorative speech signaling the normalization of monetary policy while underlining key measures to be taken in the second half.

The governor said timing of normalization will depend on the pace of economic recovery, the pandemic situation, risks of financial imbalance as well the Fed monetary policy that has enormous influence over the domestic economy.

Also on May 27, Lee mentioned for the first time since the COVID-19 outbreak the possibility of adjusting the rate hike by saying, "If the economic situation improves, then there is a need to adjust the measures in line with the situation."

Joo Won, deputy director of the Hyundai Research Institute, voiced a similar view with Lee, although he stressed that "everything will ultimately depend on the Fed's stance."

While acknowledging the Fed's influence, Lee has viewed that monetary policy should be decided based on the condition of the domestic economy and that the BOK could raise its key rate faster than the Fed's.

The signs of the country's economic recovery are seen from the revised 2021 economic outlooks by multiple institutions.

The BOK revised its 2021 growth outlook recently from 3 percent to 4 percent, the OECD from 3.3 to 3.8 percent and the IMF from 3.1 percent to 3.6 percent.

The country saw its exports jump 45.6 percent in May from a year ago, the sharpest rise since 52.6 percent posted in August 1988.

Also in May, the consumer sentiment index rose to 105.2, its highest level in three years. A reading above 100 means optimists outnumber pessimists.


Yi Whan-woo yistory@koreatimes.co.kr


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