Short-term bond prices tumble on “orderly” rate normalization comment from BOK chief

2021.06.11 13:56:34

[Photo by Bank of Korea]이미지 확대

[Photo by Bank of Korea]

South Korea’s central bank chief on Friday echoed U.S. Treasury Secretary Janet Yellen in readying the market for interest rates moving up from record-low levels within the year.

“If we can expect the economy to keep up solid recovery pace, current loose monetary policy would have to be normalized in timely and orderly manner,” Bank of Korea (BOK) Governor Lee Ju-yeol told bankers celebrating the 71st anniversary of the central bank founding.

The timing and pace in adjusting the loose rate and monetary policy will depend on the virus developments, economic growth pace and sustainability and financial risk from private debt load, he said.

Lee had floated the possibility of a rate hike within the year last month after sharply raising the bank’s growth outlook for this year and next. “A rate hike within the year would depend on the economic developments,” he said, pointedly referring to a hike for the first time.

The benchmark rate has stayed at the historic low of 0.50 percent since May last year after back-to-back cuts from 1.25 percent upon the sweeping outbreak of Covid-19 in February.

The debt market was mixed upon Lee’s clearer harbinger for a tightening.

The shorter-dated bond yields rose on the bet of a rate hike, while the longer ones that have gained faster already fell on profit-taking. The one-year government bond yield rose 4.1 basis point to 0.760 percent, the two-year one 4.4 basis points to 1.184 percent and the three-year 2.1 basis point to 1.303 percent. The 10-year government bond yield fell 0.9 basis point to 2.076 percent.

The governor has been readying the market for higher rates by raising concerns about “deepening financial imbalances” – or the bubbly asset market and unfazed growth in household debt due to lush liquidity from record fiscal and monetary stimuli to fight Covid-19.

The rationale for tightening quickly built up after the economy picked up faster-than-expected 1.7 percent in the first quarter and exports have been roaring at record levels so far in the year that boosted growth outlook to 4.0 percent from 3.0 percent.

As in the U.S. and elsewhere, inflation from surging commodity prices also has added grounds for a monetary policy response.

By Pulse

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