Bank of Korea’s Lee Signals More Hikes Ahead, Avoids Timetable
Bank of Korea Governor Lee Ju-yeol said interest rates are still accommodative after two hikes since August, suggesting further tightening is in the pipeline as inflation risks mount in the recovering economy.
The board considered the price pressures building in the economy and financial imbalances when it decided to raise rates by 25 basis points to 1% on Thursday, Lee said at a press briefing. The central bank revised up its inflation outlook to 2.3% for this year and 2% for 2022, expecting price gains will exceed, or at least hover around, its target through next year.
“With this hike, the policy rate is still below the neutral level, the real rate is still negative, and there’s plenty of liquidity,” Lee said. “It’s natural that we normalize the rate, which has been excessively low, as the economy recovers.”
Korea’s bond yields fell and futures rose following the decision, as the governor failed to commit to a firm date for the next hike. While Lee said he’s not ruling out a shift in the first quarter of next year, his tone was less hawkish than some investors had been anticipating.
One of the BOK’s seven policy members dissented from Thursday decision and called for rates to remain unchanged, largely in line with market expectations of the likely voting pattern.
The won weaken 0.3% against the dollar to 1,189.70 as of 12:42 p.m. in Seoul and the yield on three-year government bonds fall seven basis points to 1.94%.
“Concerns that this meeting will be a hawkish hike seems to have eased as Lee said the timing of the next rate increase will depend on the economy and didn’t specify a timing,” said Cho Yong-gu, a fixed-income strategist for Shinyoung Securities.
The BOK initiated its tightening cycle in August with a focus on reining in financial imbalances, but Lee’s comments Thursday made clear that inflation has become equally, if not more of a concern to policy markers. On the economy, the BOK kept forecasts unchanged at 4% growth for this year and 3% for 2022.
Central banks worldwide are grappling with price pressures that threaten to destabilize their economies’ recovery from the pandemic. New Zealand on Wednesday signaled aggressive tightening ahead after hiking for the second time in two months, while surging U.S. prices are pressuring the Federal Reserve to pivot more quickly to tightening.
Lee referred to global supply bottlenecks and rising inflation expectations among the Korean public as factors that could fuel further price gains in the economy. The Fed’s policy moves will be an important consideration for the BOK, but domestic conditions will take priority, the governor said.
Swaps markets are pricing in the key rate climbing to more than 1.75% in the next 12 months, a steeper rise than the median estimate of economists for the benchmark to reach 1.25% by the end of 2022.
But adding to uncertainty is Korea’s virus situation: the number of daily cases reached a new record this month as the government loosened restrictions. In addition, while exports have so far benefited from a pandemic-era boom in tech demand, a normalization of that trend could see trade become less of a support to growth.
Governor Lee now has two more decisions before he steps down in March 2022. Economists are split over whether he will use the meetings to push rates higher, or stand pat and leave any further policy changes to his successor.
Further clouding the outlook is a presidential election in March. With President Moon Jae-in’s term ending in May, it’s unclear whether he will opt to leave his mark by naming a new governor, or defer that decision to the next administration.
©2021 Bloomberg L.P.