Bank of Korea raises rate to 1.75%, but claims still “accommodative”

2018.11.30 09:59:41 | 2018.11.30 16:30:49

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The Bank of Korea (BOK) closed this year’s monetary policy calendar on Friday with its first rate move in a year so as not to aggravate jitters in the market about the economic prospects, bubbles in debt and assets from the protracted low-interest environment, and widening gap with U.S. interest rates.

The BOK’s Monetary Policy Committee on Friday bumped up the benchmark rate to 1.75 percent from 1.50 percent in its first rate action since November last year when the rate rose from a record low of 1.25 percent. Over the same period, the U.S. Federal Reserve has raised its policy rate four times to put the fed fund range at 2.0-2.25 percent. Many had warned of capital flight should the spread widen to 100 basis points as the Fed is expected to deliver another hike in December.

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The decision was not unanimous with two dissenting votes in the seven-member board against a hike, anxious of the impact on the fragile domestic demand and colossal household debt exceeding 1,500 trillion won ($1.3 trillion).

“The policy rate remains below a neutral level after the latest hike. One hike does not mean our policy stance is no longer accommodative (of the economy),” BOK Governor Lee Ju-yeol said in a press conference after presiding over this year’s last monetary policy meeting.

Neutrality has become a buzzword for central bankers to signal the scope and direction of rates ever since Federal Reserve Chairman Jerome Powell brought it up to speak on the pace of rate normalization.

In early October, he had said, “We may go past neutral, but we’re a long way from neutral at this point, probably,” a comment that caused tantrums in emerging markets in fear of a faster tightening campaign.

In a surprising about-turn, Powell on Wednesday said interest rates remain “just below the broad range of estimates of the level that would be neutral for the economy - that is, neither speeding up nor slowing down growth”. Markets interpreted this as a sign that the U.S. may become more prudent in raising the rates next year amid uncertainties about the global economy and easing inflationary pressure from softening in oil prices.

U.S. Federal Reserve Chairman Jerome Powell이미지 확대

U.S. Federal Reserve Chairman Jerome Powell

Lee said the BOK could no longer put off anticipated hike to address the imbalance in the financial sector and bubbles in real estate assets and private debt from protracted low interest rate environment.

“Higher interest rates will be helpful in reducing the financial imbalance,” he said. Financial imbalance refers to concentration of funds in the real estate market due to poor returns from capital investment amid low interest rates.

The central bank also is mindful of the uninterrupted gain in household debt that has topped 1,500 trillion won in the third quarter.

“Household debt data is one we are closely watching,” he added.

Although uncertainties have been added on the external front, he disagreed with the view that the economy would enter a downturn in 2019 and believed the economy would grow within its potential of “around 3 percent”.

The three-year government bond yield ended Friday 0.8 basis point higher at 1.897 percent, and the five-year bond yield unchanged at 1.972 percent. The main Kospi bourse fell 0.82 percent to close at 2,096.86.

Lee said the next rate move will depend on price and economic performance.

According to the October data released on Friday, output, private consumption and capital investment rebounded slightly, whereas indicators for future activity remained negative. The seasonally adjusted mining and manufacturing output rose 1.0 percent on month after reversing from a 2.7 percent fall. Retail sales added 0.2 percent on month, and capital investment grew 1.9 percent.

The next rate-deciding meeting will be held on January 24, 2019.

By Lee Ha-yeon

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