Bank of Korea’s Lee Sees Solid Recovery as Data Beat Estimates

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Bank of Korea Governor Lee Ju-yeol’s optimism on the strength of the recovery and the latest inflation and growth data add support to views that the central bank will raise rates again this year.  

In a speech at a local conference on Thursday, Lee said South Korea’s “solid recovery trend will continue” amid the spread of the delta variant as increasing vaccination rates and resilient exports offer support. 

“Our economy showed a faster-than-expected recovery in the first half thanks to aggressive policy responses and a global economic recovery,” Lee said, according to a transcript of his speech provided by the BOK. 

His confidence was backed by reports released Thursday that showed a revised-up growth estimate and inflation running above the central bank’s target. Korean consumer prices rose 2.6% from a year earlier in August, beating estimates for a 2.4% rise. 

Read More: Bank of Korea Seen Hiking Once More Before Lee Departs in March

Bank of Korea’s Lee Sees Solid Recovery as Data Beat Estimates

The central bank took the country’s worst-yet outbreak in stride when it raised rates last week, saying mounting household debt and other financial imbalances are a bigger threat to the economy than the virus. After the decision, Lee indicated policy normalization will continue, with a majority of economists picking November as the most likely month for the next move. 

What Bloomberg Economics Says...

“Our baseline forecast is for the central bank to deliver another hike in early 2022. But we see the risk of that moving up to November, with a faster-than-expected recovery, firming inflation or Federal Reserve policy shift among the factors that could nudge the BOK.”

--Justin Jimenez, economist

To read the full report, click here.

The August inflation report released by the statistics office highlights a buildup of price pressures as the economy remains resilient. Consumption has been holding up even amid strict restrictions that have continued since early July. Companies may be passing on to consumers the increased costs associated with rising raw material prices and a global supply squeeze. 

The upward revision to second quarter growth, to 0.8% from 0.7%, was due to better investment performance than the initial assessment, the BOK said. Exports of goods were lowered marginally.   

Overall, the higher readings suggests the central bank’s latest economic forecasts are likely to materialize. The BOK held its growth forecast at 4% for this year, and raised its inflation forecast to 2.1% from 1.8% at the Aug. 26 meeting.  

“The primary reason for BOK to raise rates further is still the range of financial issues such as overheated asset markets and household debt,” said An Young-jin, an economist at SK Securities. “But the strong inflation provides the right backdrop for another hike, ensuring the side effects of tightening are more easily absorbed.”

Korea’s inflation may further get a boost from a 34.9 trillion ($30 billion) extra budget passed in July, which will provide cash handouts for almost 90% of the population starting this month. The Chuseok holiday later this month when families gather could also fuel food price gains. 

Weakness in the Korean won this quarter has contributed to a jump in prices of imported items in the past few months. Factory gate prices are at a decade-high, underscoring the strong inflation environment. 

Transportation costs led the gains in inflation in August, jumping 8.2% from a year earlier. The prices of groceries and non-alcoholic beverages rose 5.6% and those in the entertainment and cultural sectors increased 1.4%.

Prices of home-ware and household services increased 2.9% and utility costs gained 2.3%. Education prices slipped 0.7% and communications costs fell 2.2%. 

Compared with the previous month, consumer prices rose 0.6% in August. Core inflation came in at 1.8% versus the prior year.

©2021 Bloomberg L.P.

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