Bank of Korea Governor Lee Ju-yeol formally alerted “moderation” in loose monetary policy, or lift in interest rates, on more evident signs of economic recovery while keeping the benchmark rate unchanged at the record-low level for more than a year.
The monetary policy meeting on Thursday held the base rate at 1.25 percent that was last cut to the level in June 2016.
But Lee in a press conference said there is a need to “moderate” the monetary easing pace upon clearer signs of economic strength while claiming that the move does not necessarily mean “tightening.”
The last time the Korean central bank pushed up the key rate was in June 2011 - when it was bumped up from 3.00 percent to 3.25 percent.
The bank nevertheless revised up its outlook for this year’s gross domestic product (GDP) to 2.8 percent from 2.6 percent last estimated in April upon stronger-than-expected recovery in exports. It is the third time for the bank to raise the economic growth estimate this year. In January, it had estimated 2.5 percent growth.
The inflation forecast for this year was kept unchanged from 1.9 percent estimated in April.
Lee said the upgrade in this year’s growth outlook to 2.8 percent did not reflect the effect from supplementary budget, indicating that growth could hit 3 percent this year after extra fiscal spending.
Korean shares were uplifted by the rosier outlook with the main Korean composite stock price index up 0.74 percent at 2,409.49.
The bond market was unconcerned by the reiterated hint of interest rate upon the belief that the Korean central bank wouldn’t rush to make a rate move, given still-sluggish domestic demand and worsening unemployment as well as the subdued inflation in the U.S. that could influence the U.S. Federal Reserve’s tightening path.
The three-year government bond yield was at 1.745, down 1.7 basis points, while the 10-year yield dropped 3.4 basis points to 2.238 from the previous session.
Exports have been robust in the first half, but growth was limited to electronics components and ships. Domestic demand data remained weak.
“Exports are strong and consumer sentiment has improved, but the recovery in domestic demand has been lackluster,” said the government in July economic report.
The government under new President Moon Jae-in has proposed an extra budget of 11.2 trillion won ($9.8 billion) to kick-start the economy through increased public-sector hiring, but the bill has been stuck in the legislative stalemate.
The ballooning household debt also is another constraint on the BOK. Household debt hovering at 1,400 trillion won could further burden debt-ridden households and self-employed businesses struggling under stagnant income as well as jeopardize the financial system.
The Korean central bank has been under pressure after the market rates have been moving up following the increase in the U.S. interest rates.
The market interpreted that the U.S. Fed could moderate its pace of normalizing interests from recent testimony by Fed Chair Janet Yellen who told the Congress that “We are watching inflation very carefully.”
By Kim Gyu-sik
[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]