Bank of Korea On Track for Rate Hike as Virus Hit Played Down

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Bank of Korea Governor Lee Ju-yeol said the central bank will discuss raising its key interest rate from its next meeting in August after playing down the likelihood that the latest virus surge will dent the economy’s recovery.

While the bank left rates unchanged at 0.5% at the end of its policy meeting Thursday morning, a call for a quarter percentage point hike from one member helped send Korea bond futures plunging and strengthened the won as investors boosted their hawkish bets the BOK to move early.

“The need to deal with the issue of financial imbalances through the normalization of monetary policy has become greater than before,” Lee said at a press briefing following the decision. “From the next meeting, it would be time to discuss and consider whether we should adjust policy accommodation,” adding that a potential hike in August would still depend on Covid-19 developments.

The comments showed that a surge in Covid-19 cases hasn’t pushed the BOK off track from normalizing policy this year. That’s because Lee sees the economy’s rapid recovery largely withstanding the latest round of restrictions as the government tries to rein in rising infection numbers and prepares an extra budget.

Lee added that while there was no timetable for raising rates, there was no need to delay a move if the economy’s recovery remains steady.

“Lee has made it clear the BOK is willing to raise the rate as early as August,” said Roh Hyun-woo, a strategist at Hanwha Asset Management, referring to the central bank’s comments on adjusting accommodation. “The BOK is buying into more reasons to lift rates than not.”

With Koh Seungbeom having called for a hike, the next board member likely to join him is Cho Yoon-Je, who has made comments viewed as hawkish in the past, Roh said. That would pave the way for Lee and his senior deputy governor to hold a casting vote and determine the outcome in the August meeting, he added.

Korea is going through its worst outbreak of the pandemic, with about half the population placed under a semi-lockdown this month. The government reported another 1,600 cases Thursday, close to Wednesday’s pandemic high.

Despite the likely hit to consumption from tighter restrictions on activity, the central bank said the economy can grow 4% this year, essentially offering a green light for Lee to proceed with his plan to start normalizing policy this year to curb financial risks.

Swap markets are pricing in at least one 25 basis point increase in the next three months. The yield on Korea’s three-year government bonds jumped eight basis points to 1.47% as of 12:39 p.m. in Seoul. The won gained 0.4% to 1,144.35 against the dollar.

A hike would make the BOK one of the first central banks in the developed world to end its run of record-low rates, a move that would have more far-reaching consequences across the economy than the bond-buying taper underway in some countries. New Zealand, which this week announced an end to quantitative easing, is also seen as likely to raise rates earlier than most.

What Bloomberg Economics Says..

“Assuming the outbreak is contained in the coming months and the vaccination drive re-accelerates as more supply becomes available, our forecast is for a 25 bp hike to 0.75% in November -- the BOK’s last meeting of 2021.”

-- Justin Jimenez, Asia Economist

To read the full report, click here

Before the latest wave, Korea’s exports were fueling a rebound in domestic sectors, with rising employment and consumers growing optimistic. That prompted the central bank to raise its 2021 growth forecast by a full percentage point in May to 4%.

Against this backdrop, the BOK turned its focus to financial stability, reinforcing the message that gains in property prices have been excessive and risk-taking among individual investors has outrun economic fundamentals.

Lee said targeted government aid, not BOK support, was needed for those sectors of the economy still suffering in the pandemic.

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