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| Bank of Korea Governor Lee Ju-yeol speaks during an online press briefing held at the bank's headquarters in Seoul, Thursday. Yonhap |
Central bank raises key interest rate by 25 basis points to 1%
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Bank of Korea Governor Lee Ju-yeol hinted at another key rate hike in the first quarter of next year, Thursday, in a clear show of determination in monetary policy normalization from emergency, ultra-low easing brought on by COVID-19 pandemic. Most factored in was elevated concerns over inflation and soaring household debt.
His remarks came less than an hour after the BOK monetary policy board voted to hike the key rate by 25 basis points to 1 percent, a widely expected move brought on by rising inflation but buttressed by the country's solid economic recovery.
The effect of monetary policy could be undermined, in the governor's view, as outpaced significantly by the stronger-than-expected recovery in the real economy, a reason why Lee considers a prompt drawdown in easing as inevitable.
Korea relative to its emerging market peers in his view is insulated from financial market volatility caused by growing expectations over a possible rate hike by the U.S. Federal Reserve in the latter half of next year, a monetary headroom created by the previous rate hike last August.
"I don't think the possibility is ruled out of a rate hike in the first quarter of next year," Lee said during a press briefing held virtually from the bank's headquarters in Seoul. "The key rate raised to 1 percent today is still accommodative, given the growth path and changes in consumer prices. Gradual yet firm policy normalization is a critically needed course of action."
He distanced himself from identifying the exact timeline for the rate hike, adding the uncertainty-swayed decision will have to factor in high-frequency datasets to arrive in the coming months.
The benchmark rate has been hovering in the zero range since the BOK cut it by a half percentage point to 0.75 percent in March last year and delivered an additional 25 basis point reduction in May the same year to an all-time low of 0.5 percent. In August this year, the central bank delivered its first pandemic-era rate increase, raising it 25 basis points to 0.75 percent.
Policy consistency, Lee stressed, will be maintained to maximize the efficiency and efficacy of macro-prudential measures recently put in place to bring snowballing household debt under control.
Continued buildup of factors exacerbating a financial imbalance ― a term mostly used to describe the surge in credit risk ― are expected to dissipate, backed by cooperation between the monetary and fiscal authorities.
"The policy effect of reducing the financial imbalance would be pronounced in the coming months, as should be followed by deterred investor behavior seeking short-term gains from the pandemic-enabled excessive borrowing over the past few years," Lee said.
The central bank maintained its growth outlook of 4 percent for this year, holding steady to an assessment made in August. However, it expects inflation will soar to 2.3 percent this year, and 2 percent next year. This is a significant upward revision from 2.1 percent and 1.5 percent announced three months earlier.
"Consumer prices rose to the low-3 percent range, driven chiefly by the steep rise in oil prices and in part a base effect from last year. Core inflation excluding volatile food and energy prices also increased to the mid-2 percent rage. The annual inflation will continue to remain elevated at a level far higher than the August outlook, before dipping to mid-2 percent next year," the governor said.
Korea's consumer inflation rose 3.2 percent in October from a year earlier, the fastest year-on-year gain since January 2012.
