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Bank of Korea governor does not rule out 'big step' rate hike

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Bank of Korea Governor Rhee Chang-yong, right, and Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho talk to reporters after their first official meeting at the Press Center in central Seoul, Monday. Joint Press Corps
Bank of Korea Governor Rhee Chang-yong, right, and Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho talk to reporters after their first official meeting at the Press Center in central Seoul, Monday. Joint Press Corps

Hope for mix between fiscal and monetary policies stronger than ever

By Yi Whan-woo

Bank of Korea (BOK) Governor Rhee Chang-yong said Monday he does not rule out the possibility of taking a "big step" ― a hike in the benchmark interest rate by half a percentage point ― in the lead-up to the BOK's next rate-setting meeting scheduled on May 26.

His comment came as the interest gap between Korea and the United States is narrowing rapidly over the U.S. Federal Reserve's faster-than-expected tapering, while a possible reversal of the interest gap is feared to spark an exodus of capital from Seoul if the BOK does not take corresponding measures.

"The decision on whether to take a big step should be made by considering how much further consumer prices will rise and other related circumstances in a comprehensive manner," Rhee told reporters after his first official meeting with Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho at the Press Center in central Seoul.

He said Korea is "not in a position to completely put aside the possibility of a big step due to uncertainties," although Fed Chairman Jerome Powell said earlier in May that the Fed is not actively considering a 0.75-percentage-point rise at the upcoming rate-setting meetings in June and July.

While Powell sounded less hawkish than expected by some investors, he still hinted at multiple 50-basis-point rate hikes.

If realized, the policy rate of the U.S. that remains in the range of 0.75 percent to 1 percent can outpace that of Korea at 1.50 percent unless the BOK moves faster to hike the rate.

"The BOK's monetary policy board will monitor price trends and other economic factors in determining the base rate in May as well as July and August." Rhee said.

The BOK chief's remark prompted the yield on three-year treasury bonds to jump 17 basis points to 3.08 percent during intraday trading.

In what was seen as a bid not to provoke the market, the BOK said in a statement that Rhee's remark should be seen as a "theoretical view that the BOK considers every possibility in its monetary policy."

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, left, and Bank of Korea Governor Rhee Chang Yong speak during a breakfast meeting at the Press Center in central Seoul, Monday. Joint Press Corps
Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, left, and Bank of Korea Governor Rhee Chang Yong speak during a breakfast meeting at the Press Center in central Seoul, Monday. Joint Press Corps

Meeting between finance minister, BOK governor

The first official meeting between Choo and Rhee after the launch of the new government, May 10, is believed to raise hopes of a much-anticipated coordination of fiscal and monetary policies.

The policy coordination has always been regarded as being critical. Nevertheless, its importance has been underscored increasingly in past months over the slower growth outlook and soaring prices, which together make it trickier for President Yoon Suk-yeol to effectively juggle both growth and inflation.

Under the circumstances, Monday's meeting possibly re-affirmed that Choo and Rhee, as advocates of market capitalism, are on the same track in reviving the pandemic-stricken economy.

The two discussed ways to stabilize inflation, financial market volatility and bolster policy coordination during their breakfast meeting.

They shared the same opinion that growing concerns over stagflation ― a toxic combination of stagnant growth and persistently high inflation ― and a plunge in both stock prices and the Korean won's value against the dollar are attributed to the prolonged war in Ukraine and the tightening of U.S. monetary policy.

They especially called for "countermeasures in a comprehensive manner" against inflation, noting its accelerated pace could further weigh on the economy.

"The central bank and the government need to consult each other, share ideas and come up with a mix of policies more than ever at a time when the economic situation is in grave danger, while we have limited options concerning tools to cope with the situation," Choo told journalists after the meeting.

Rhee told reporters, "The economic challenges that the nation faces are not something that can be resolved by any party alone but need cooperation among relevant ministries."

"Therefore the role of Deputy Prime Minister Choo on coordination is more crucial than ever," he said, adding he "absolutely agrees with" Choo on his repeated pledge to meet the BOK governor so frequently that such meetings do not become worthy of news coverage.

A possible measure discussed by the two to tackle a weakening won is believed to be resuming a currency swap with the U.S.

Concerning the Yoon government's proposal of 59.4 trillion won ($46.2 billion), May 12, as the nation's second extra budget of this year, Choo said it will "not have much impact on inflation."

Both Choo and Rhee served as vice chairmen of the Financial Services Commission (FSC) under the 2008-13 government of business executive-turned president Lee Myung-bak.

They also have a shared history of working at international financial institutions.

A former financial bureaucrat, Choo was a senior economist at World Bank-administered International Bank for Reconstruction and Development and a counsellor for economics and finance at Korea's Permanent Delegation to the Organization for Economic Cooperation and Development.

A former economics professor, Rhee was a senior economist at the Asian Development Bank and a director of the Asia and Pacific Department at the International Monetary Fund.


Yi Whan-woo yistory@koreatimes.co.kr


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