Bank of Korea (BOK) Governor Lee Ju-yeol yesterday 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 percent, Lee told a press briefing.
The central bank revised up its inflation outlook to 2.3 percent for this year and 2 percent for next year, expecting price gains would exceed, or at least hover around, its target through next year.
It also forecast GDP unchanged at 4 percent growth for this year and 3 percent for 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.”
Bond yields fell and futures rose following the decision, as the governor failed to commit to a firm date for the next hike.
One of the central bank’s seven policy members dissented from the decision and called for rates to remain unchanged, largely in line with market expectations of the likely voting pattern.
“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,” Shinyoung Securities Co fixed-income strategist Cho Yong-gu said.
Central banks worldwide are grappling with price pressures that threaten to destabilize their economies’ recovery from the COVID-19 pandemic.
New Zealand on Wednesday signaled aggressive tightening ahead after hiking for the second time in two months, while surging US prices are pressuring the US Federal Reserve to pivot more quickly to tightening.
Lee referred to global supply bottlenecks and rising inflation expectations among the 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, he said.
However, adding to uncertainty is South Korea’s COVID-19 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.
Lee now has two more decisions before he steps down in March next year.
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