The Bank of Korea (BOK) yesterday raised its policy rate for the first time in almost three years, becoming the first major Asian central bank to shift away from COVID-19-era monetary settings as ballooning consumer debt creates new threats for the South Korean economy.
BOK Governor Lee Ju-yeol maintained his hawkish tone and suggested that the bank could further tighten policy as data showed that Asia’s fourth-largest economy was overheating.
“We won’t be doing things in a hurry, but we also won’t hold off,” Lee told a news conference, responding to a question about the timing for additional tightening.
“As for timing for the further hikes, we will consider how the COVID-19 situation plays out, and changes in the Fed’s [US Federal Reserve] policy stance, which would have an important impact for us, as well as how the financial imbalances play out,” Lee said
BOK board member Joo Sang-yong was the only one of the six board members who voted to keep rates steady as the bank raised the benchmark interest rate 25 basis points to 0.75 percent, as expected by most analysts.
The central bank also pushed up its inflation projection to 2.1 percent from 1.8 percent previously, signaling that conditions are building for further policy tightening.
“If there will be another rate hike within this year, it will likely be November, given that there will be at least two to three rate hikes needed including today’s meeting to address financial imbalances risk,” said Paik Yoon-min, a fixed income analyst at Kyobo Securities.
Policymakers had been signaling higher rates since May, but expectations for an increase in the past few months were pared due to South Korea’s latest COVID-19 outbreak, which forced the economy into semi-lockdown.
Central banks around the world are laying the groundwork for a transition away from crisis-era stimulus, as what began as emergency support for collapsing growth now overheats many economies.
The BOK’s move came a day before Fed Chairman Jerome Powell is due to deliver his keynote address at the US central bank’s annual symposium in Jackson Hole, Wyoming, where he is expected to signal the future direction of US monetary policy.
Most central banks that have raised rates this year are among emerging economies, concerned about capital flight and imported inflation. In Asia, Sri Lanka raised rates last week, making it the first in the region to do so.
The BOK’s decision represents a calculated risk that South Korea’s export-driven economy, which has soared back from last year’s COVID-19 slump, is healthy enough to start trimming stimulus, especially as debt bingeing is becoming an economic issue.
That contrasts with New Zealand, which last week delayed a widely expected interest rate increase as its first COVID-19 outbreak in six months cast uncertainty over its economic recovery.
Analysts expect the BOK to raise interest rates next year, with most seeing the base rate at 1.25 percent by the end of next year, although Lee’s comments suggest that the bank remains on a hawkish footing.
The policy decision is the first rate review the central bank has had as a six-member body after board member Koh Seung-beom left the board to head the South Korean Financial Services Commission.
There are two more interest rate review meetings scheduled this year.
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