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| Bank of Korea Governor Lee Ju-yeol speaks during a press conference in Seoul, Friday, after holding a monetary policy board meeting when the central bank decided to increase the key rate to 1.25 percent. Courtesy of Bank of Korea |
'Monetary policy still accommodative despite three rate hikes'
By Lee Min-hyung
Bank of Korea (BOK) Governor Lee Ju-yeol hinted Friday that the central bank will continue to hike interest rates in the months to come in a bid to reduce risks on widening financial imbalance and escalating inflationary pressure.
The message came later in the day after the central bank raised the key rate by 25 basis points to 1.25 percent during a monetary policy board meeting. The BOK also underscored the need to increase it further in accordance with economic circumstances here and abroad.
"We still consider the monetary policy accommodative," Lee told reporters during an online press conference. "Even if we raise the benchmark rate once more to 1.5 percent, Korea's monetary policy is not in a contractionary level."
Early in the COVID-19 pandemic, the BOK cut the base rate to a record low of 0.5 percent in May 2020, but started increasing it from August 2021, citing growing risks on prolonged financial imbalance and rapid inflationary pressures. The current 1.25 percent key rate is on par with the pre-pandemic level.
According to a statement released by the BOK monetary board, Korea's consumer price inflation will come up to the mid-3 percent range in the next few months, and the figure is estimated to average mid-2 percent for the year .
But the hawkish monetary policy raises concerns over a possible drop in Korea's 2022 GDP growth at a time when the economy is still grappling with the unceasing spread of the coronavirus and its variants. The government is also reinforcing rules on social distancing, which is feared to put a damper on domestic consumption and overall economic recovery here.
Despite such worries, Lee reiterated the bank's willingness to place more focus on stabilizing price levels and financial risks.
"When operating monetary policies, our priority is how to manage risks on financial stability, inflation and economic conditions, even if the BOK also takes into consideration structural issues ― such as the potential drop in the GDP growth," he said.
Regarding the expiration of the Korea-U.S. currency swap deal, the BOK said it does not have any immediate plans to sign a new swap agreement with the world's largest economy. The two countries signed the $60 billion (71.2 trillion won) currency swap deal in March 2020 shortly after the pandemic began, but reached a consensus not to extend further after it expired at the end of 2021.
"The financial market has been stabilizing at a rapid pace after March 2020, so we have since seen little justification to extend the agreement," Lee said.
