Bank of Korea Lee Sees No Rate Hike Rush Amid Faster Growth

Bank of Korea Governor Lee Ju-yeol said he expects faster inflation and economic growth this year, but dismissed the view that the central bank needs to tighten policy early to tackle rising financial risks.

In comments released Wednesday, Lee pointed to improving exports and investment, along with an extra budget pending parliamentary approval, as factors likely to drive economic growth beyond the BOK’s 3% forecast in February. Lee said inflation will also probably accelerate beyond the bank’s previous 1.3% projection.

The governor’s comments come amid a wave of forecast upgrades for Korea’s economy as recent data show its recovery gathering pace, fueling talk of when the central bank might start to consider throttling back its stimulus.

Bank of Korea Lee Sees No Rate Hike Rush Amid Faster Growth

The statement was formatted as Lee’s response to questions on the economy and markets, and was released to communicate with central bank watchers before the next policy review in April given the long gap between meetings. Lee’s views also echo those of President Moon Jae-in who also projected a “faster and stronger” rebound for the economy.

Aiming to tamp down expectations of tightening while acknowledging a brighter outlook, Lee emphasized there is no urgency to adjust the bank’s policy stance. Having cut the key rate to a record 0.5% last year, the BOK has repeatedly pledged to keep policy accommodative until the economy stages a sustainable recovery from the pandemic.

“There could be views that the timing for shifting monetary policy could be moved forward” due to an improved outlook and growing concern about financial imbalances, Lee said. “Still, the economy hasn’t recovered to its normal trajectory, and the current situation doesn’t call for a rush to adjust the policy stance.”

Korea’s 10-year government bond yields slid 6 basis points to 1.97% as of 2:28 p.m. in Seoul. The won weakened 0.3% against the dollar to 1,132.65.

Bank of Korea Lee Sees No Rate Hike Rush Amid Faster Growth

The statement came amid a string of forecast upgrades by economists in the private sector. Goldman Sachs on Wednesday said it now sees a 4.1% expansion for Korea this year, up from its earlier 3.8% view, as the export-led recovery broadens to domestic demand. Barclays Bank Plc on Tuesday upped their projection to 3.7% from 3.5%.

Lee said the pace of recovery will hinge on Covid developments, vaccine distribution, as well as the strength of the global semiconductor industry and how U.S.-China trade tensions unfold.

On inflation, Lee said an outburst of pent-up demand as outbreaks subside may temporarily fuel a rise in consumer prices. A sustained pickup is unlikely, though, so it’s not time to worry about inflation risks or to respond with monetary policy.

Other comments:

  • Inflation may reach the upper 1% range during the second quarter due to a base effect from an oil-price plunge last year, and then stay within the mid-to-upper 1% range in the second half of the year.
  • The amount of outright government bond purchases depends on the pace of yield gains, as well as the drivers behind rises. Managing liquidity after buying is also an important factor. For now, the BOK is able to buy bonds “without particular difficulty.”
  • The yield spread between short- and long-term bonds has widened in March at a “faster pace than expected.” The BOK’s monetary stabilization bond issuances can be “flexibly adjusted” as needed to respond to market volatility and any supply-demand mismatches.
  • BOK bond purchases aim to stabilize markets, and are different from quantitative easing or operation twist.
  • Demand for cryptocurrencies as a settlement tool is expected to fall when central banks issue their own digital currencies. The BOK is planning to test its own in a virtual environment during the second half.

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