South Korea may be ready to raise its key interest rates from its record-low level possibly within the year to contain personal debt and inflationary buildup, according to Bank of Korea’s chief Lee Ju-yeol after the bank on Thursday forecast the economy could grow at the strongest pace in more than a decade this year.
[Photo by Bank of Korea]
The central bank must not move too fast or too slow in a monetary shift to sustain recovery pace and at the same time prevent buildup of financial imbalances, Lee said in a press conference following the monetary policy meeting that kept the policy rate steady at a record low of 0.50 percent for a yearlong.
“The likelihood of a rate hike taking place within the year will depend on the economic developments,” he said in the most hawkish comment so far as he had reiterated it was premature to consider a change in the monetary policy only last month.
The central bank turned much more sanguine on the outlook for this year and the next as exports extended roaring rebound of around 50 percent in April and so far in May by raising growth estimate to 4.0 percent from 3.0 percent in February for this year and to 3.0 percent from previous 2.5 percent for next year.
Bond prices fell sharply in the longer-dated bonds upon the signal of a rate hike possibly in the second half. The 10-year government bond yield rose 2.6 basis points to 2.154 by midday, while the five-year bond yield added 0.6 basis points to 1.678 percent.
The Korean currency added 0.1 percent to finish at 1,118.10 won again the US dollar. The Kospi ended the day 0.11 percent lower at 3,164.95.
Lee suggested tightening is needed to contain the unfazed growth in household debt and chase of risky assets. ??? ??
“Economic development is most important (factor behind a rate hike), and then containing financial imbalances. There is also a need to curb excessive risk-taking in the financial market,” he said.
“Financial imbalance” usually refers to excessive debt rise. “We are very concerned that some of the reasons behind consumer debt surge stem from risk-taking behaviors related to soaring asset prices. If the household debt growth persists, side effects would be great and we must contain the growth,” he said.
Household debt reached a fresh historic high of 1,765 trillion won ($1.6 trillion) by the end of March.
The bank is closely watching the flow of debt into cryptocurrencies amid the rapid expansion of crypto market and heavy volatility as leveraged investment can raise the risk in personal loans and lenders.
Inflation also could strengthen if consumption improves on top of strong commodity prices.
“Inflation will stay around 2 percent in the first half and fall to mid 1 percent level next year as supply-end factors from strong oil and food prices will likely subside,” Lee said, while adding core inflation could strengthen next year from demand pressure.
In its revised outlook, the bank estimated inflation at 1.8 percent for this year and 1.4 percent for next year.
By Cho Jeehyun
[? Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]