South Korea Doesn't Seem Too Worried About Delta. Are You?

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The Bank of Korea has become the first advanced Asian economy to raise interest rates after the pandemic. This isn’t a one-and-done. When central banks start cutting or raising borrowing costs, they rarely pause after one move, because a single step gets little macroeconomic traction. Policy makers also face a public-relations debacle if they abandon new strategies quickly. So Governor Lee Ju-yeol would have thought long and hard before this decision. The question is whether the pandemic behaves.

On Thursday, the BOK raised its benchmark rate a quarter of a percentage point to 0.75%, citing worries about asset bubbles and other financial imbalances. Household debt has been surging and the property market is frothy. Lee, meanwhile, seems unfazed by delta’s risks. “The Board will gradually adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth and inflation to run above 2% for some time, despite ongoing uncertainties over the virus,” the BOK said in a statement. In other words, delta won’t stop the BOK from hiking. Capital Economics’ Alex Holmes expects that, given the hawkish comments, the next increase will come in November, with the tightening cycle continuing well into 2022. 

The domestic economy does have some bright spots, and growth this year is projected to hit 4%. The forecast expansion assumes that infections start to decline in October, Lee said, while inflation will pickup to 2.1%, exceeding its target slightly. Exports have performed strongly thanks to the robust tech demand in the work-from-home era. Business confidence has held up and optimism still prevails among consumers. Lee told reporters that, against this backdrop, rate levels are accommodative and below neutral, central bank-speak for “too low for comfort.” Some critics even said Lee waited too long.

Yet South Korea is tightening into an ambiguous regional and international environment. Just ask New Zealand, which drew many comparisons in the lead-up to Thursday’s announcement. The Reserve Bank was considered a shoo-in for a rate hike last week until one Covid case spurred a lockdown and the RBNZ blinked. By the time Korean officials sat down this week, economists were split

Bigger players are also wavering. China signaled that July's cut in bank reserve rates is unlikely to be the last. The Bank of Japan reckons the delta variant will delay the recovery.

Lee did acknowledge that uncertainty from the virus is still high, and assured the increase, in itself, wouldn’t harm the economy. While signaling future hikes, he also stressed that the bank will take things gradually. You can blame the pandemic for the degree of verbal gymnastics required to convey this message, but monetary policy turning points have always been difficult to communicate.

Federal Reserve Chair Jerome Powell can empathize. The Fed is expected to begin reeling back quantitative easing in the coming months. His task until then is to explain that some progress has been made toward his goals, but not necessarily “substantial further progress” — the threshold for the taper to begin. 

It’s too bad Korea didn't have a QE program like that of the Fed, the Bank of England or the European Central Bank. The BOK would have had the option to wind it back a bit, which is far less drastic than raising borrowing costs. The pandemic has proven that policy makers need to be nimble, but rate hikes only risk boxing Lee in.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2021 Bloomberg L.P.

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