Bank of Korea Lee Flags ‘Orderly’ Policy Exit Amid Recovery

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Governor Lee Ju-yeol said South Korea’s central bank is preparing for an “orderly” exit from its record-low interest rate at some point as the economy recovers and financial risks mount.

Speaking after the Bank of Korea boosted its growth outlook for this year to 4% and its inflation projection to 1.8%, Lee said the central bank shouldn’t miss the timing on normalizing policy. The board still unanimously agreed to hold the key rate at 0.5% on Thursday as pandemic uncertainties linger, Lee said.

Bank of Korea Lee Flags ‘Orderly’ Policy Exit Amid Recovery

“We have eased our monetary policy to an unprecedented level, and it’s natural that we should adjust these measures as appropriate if the economic situation improves,” Lee said. “The problem is, while the economy is recovering, there are still underlying uncertainties, so we shouldn’t be hurting the momentum.”

Bank of Korea Lee Flags ‘Orderly’ Policy Exit Amid Recovery

Lee’s step toward signaling a withdrawal of pandemic-era stimulus aligns the bank with peers in New Zealand and Canada, also tiptoeing in the direction of exiting.

Still, bond yields erased earlier gains as Lee sought to reassure investors there won’t be a premature shift in policy with coronavirus hot spots still raging around the world and most central banks continuing to pledge growth support.

“A lot of central banks have difficulties in this fine balancing act” between an improving outlook and downside risks from the virus, Deutsche Bank chief Asia economist Juliana Lee said on Bloomberg Television. “We think that the central bank in Korea will be one of the first ones to go, as far as rate hikes are concerned.”

Pandemic Uncertainties

Exports and investment have led Korea’s expansion this year, lifting confidence and prompting a flurry of outlook upgrades from analysts. Economists may be bringing forward their expectations on the BOK’s likely tightening in light of the outlook upgrade.

In a separate release after Lee’s briefing, the BOK said growth could reach 4.8% under the most optimistic circumstances. In February, the BOK saw 3% growth and 1.3% inflation for this year.

What Bloomberg Economics Says...

“Large upward revisions to its growth forecasts point to greater confidence on the recovery -- backing our view for policy normalization to begin in 2022. Even so, we doubt it will be inclined to tighten too quickly with much of the world still in the throes of the pandemic.”

--Justin Jimenez, Asia Economist

To read the full report, click here.

Financial markets have so far been pricing in almost two rate increases by the BOK over the next 12 months, a more hawkish bet than economists whose median forecast is for a hike in the third quarter of 2022.

The central bank raised its growth projections for 2022 to 3%, but kept its inflation outlook unchanged at 1.4%, which is slower than this year’s forecast.

Uncertainties related to the pandemic argue against any early tightening. Korea is still finding several hundred new infection case each day and the country has yet to vaccinate a majority of its people. Employment also remains below the pre-pandemic level.

In a post-decision statement, the BOK reiterated its pledge to keep policy accommodative, but said it will pay “closer attention to the build-up of financial imbalances,” including ballooning household debt.

“Markets had already priced in a hawkish BOK,” said Lee Mi Seon, an analyst at Hana Financial Investment. “At a time when at least one rate hike is certain to come, the governor may not have come across as too hawkish in terms of the pace of hikes.”

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