Incoming Bank of Korea (BOK) governor Lee Ju-yeol said South Korean households need to prepare for higher interest rates, bolstering analysts’ forecasts for an increase as inflation picks up.
“Even when the government asks the central bank to play a role in boosting the economy, the Bank of Korea should decide after considering price stability and all other aspects of the economy, such as financial stability, growth and employment,” Lee wrote in a document in response to questions by opposition Democratic Party lawmaker Kim Hyun-mee.
With the BOK forecasting the fastest growth since 2010 and inflation rising to its target range this year, economists’ median forecast is for a quarter-point rate increase by the first quarter of next year.
“His comments are realistic and echo our view that at this level policy rates are too low,” said Leong Wai-ho (梁偉豪), an economist at Barclays PLC in Singapore, forecasting a rate increase late in the third quarter or early in the fourth. “Whether it is a quarter later or a quarter sooner, it is like a visit to the dentist — an inevitability.”
South Korea’s won strengthened 0.4 percent to 1,068.12 per US dollar as of 2:54pm in Seoul, according to data compiled by Bloomberg. The yield on South Korea’s three-year government bonds rose 2 basis points to 2.85 percent, Korea Exchange prices show.
South Korean President Park Geun-hye nominated Lee to take over after BOK Governor Kim Choong-soo’s term ends on March 31. Lee, 61, a former senior deputy governor with 35 years experience at the central bank, will face questions from ruling and opposition lawmakers tomorrow, the first such grilling of a governor nominee in the bank’s history. The lawmakers do not have the power to block the appointment.
Lee urged the government to craft a long-term plan to help households cope with their debt, which hit a record 1,021.3 trillion won (US$957 billion) at the end of December last year.
“Policymakers should help households prepare for a possible increase in interest rates, while reducing the debt burden by guiding them to shift more toward fixed rates and amortizing mortgages,” Lee said.
“The ultimate goal of price stability that the BOK is trying to achieve is to support a sound development of the national economy,” Lee wrote in the document to Kim Hyun-mee, who is one of 26 members of the committee that will question Lee this week.
While higher rates would hurt low-income earners, most of the debt is owed by those with high incomes, with the average household able to cope with a certain degree of rate rises, Lee said.
The central bank will in principle let the market set foreign exchange rates, according to Lee’s written responses to lawmakers’ question, which were obtained by Bloomberg News.
The bank will act against temporary, excessive, one-direction bets on the won, he wrote.
In case of large-scale capital flight, the central bank will use an appropriate mix of macroeconomic policy tools, including the currency, foreign exchange reserves and interest rates to help stabilize financial markets, he wrote.
South Korea’s economy is expected to grow 3.8 percent this year and 4 percent next year, the bank said in January. Inflation is forecast to accelerate to 2.8 percent in the second half of the year, back to the central bank’s target range of 2.5 percent to 3.5 percent after hovering at about 1 percent for more than a year.