The market and experts are beginning to weigh the possibility of Korea’s base interest rate going higher within the year after Bank of Korea Governor Lee Ju-yeol for the first time since heading the central bank in 2014 indicated a possible shift in long-held loose monetary policy if economic conditions show strong signs of a pickup.
The market kept to the sidelines after being rocked by Lee’s sudden comment as it waits for the action and tone from U.S. Federal Reserve’s two-day policy meeting and follow-up conference of Fed Chair Janet Yellen on Wednesday in local time. The Fed is widely expected to bump up the Fed fund target range by a quarter percentage point to 1.00 to 1.25 percent in its second hike this year after March. What the market would watch is its forward-looking tone - the pace and scope in normalizing interest rates and balance sheet from long years of ultra-low rates and abundant liquidity.
If the Fed goes on with another hike as it had previously warned of, the rates in the U.S. would be at 1.25 percent to 1.50 percent by the year-end, above the 1.25 percent benchmark in Korea.
Lee who maintained that U.S. moves won’t influence monetary policy in Korea to be accommodative of the slow-moving local economy on Monday told central bank employees to ready for the option of adjustment in policy if recovery pace in domestic economy becomes solid.
Korea’s key interest rate has come down from 3.25 percent in June 2011 and stayed unchanged at the record low of 1.25 percent since June last year.
Bank of Korea Governor Lee Ju-yeol
The benchmark three-year government bond yield jumped 6.5 basis points to 1.697 percent Monday and the five-year yield in same gains to 1.915 percent. The three-year bond yield moved up 1.710 percent in Tuesday’s morning trade and the five-year yield down to 1.901 percent.
“From foreign exchange conditions so far, the central bank does not have a good reason to shift policy,” said Kim Jung-sik, economics professor at Yonsei University. “But the bank may have to take action if foreign capital pulls out in mass-scale,” he added.
If the U.S. dollar regains strengthening momentum on top of higher rates, funds could pack out of emerging markets to migrate to the dollar zone. The BOK chief has given the market that crossed out the option of a rate hike in near future a tap to look the other way, said analysts.
“The consensus in the market has been that a hike won’t happen before the first half of next year, and Lee’s comment was a wake-up call,” said Seo Hyang-mi, a bond analyst at HI Investment & Securities Co.
Sung Tae-yoon, another economics professor at Yonsei University, also was pessimistic of a hike given the fragility in the improvement in domestic demand. “But the central bank has done well to give a heads-up.
By Kim Gyu-sik and Boo Jang-won
[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]