Central Bank Hints at Rate Hike
Current Account Expected to Be in Red Next Year
By Kim Jae-kyoung
Staff Reporter
Yielding to accelerating inflation, the central bank seems to have given up its long-held ``dovish'' stance and turned ``hawkish,'' raising the possibility of rate hikes in the months to come, despite maintaining its base rate.
Bank of Korea (BOK) decided Thursday to keep the rate unchanged at 5 percent for the 11th month in a row, on high-flying oil prices coupled with an economic slowdown.
However, the bank strongly hinted at hiking the benchmark seven-day repurchase agreement rate in the coming months, in a bid to put a lid on surging inflation.
``Policy rate decision-making is becoming more difficult with high inflation coinciding with an economic slowdown. At this time, we have to think about the core task of the central bank,'' BOK Governor Lee Seong-tae told reporters during a press conference following the bank's July monetary policy meeting.
``Consumer price inflation has picked up pace, mainly on the back of high-flying oil costs, and inflation seems likely to remain significantly high for quite some time,'' Lee said.
His remarks can be widely taken as a strong indication that the central bank will tighten credit this year.
``I think it was a preliminary step to raising interest rates in the coming months, as inflationary pressure will be accelerating going forward,'' Korea Institute of Finance Vice President Park Jae-ha told The Korea Times.
``Since the economy is losing steam, aggressive rate cuts are unlikely. However, I think that the central bank will hike interest rates a couple of times by 25 basis points this year to tame inflation,'' he predicted.
Citigroup economist Oh Suk-tae echoed the view, saying, ``The comments suggest that the central bank is inching toward hiking rates .''
``I think that the central bank will raise interest rates in August and September by 50 basis points each,'' he added.
The upward spiral in all price indicators has given more leeway for the bank to tighten its monetary policy. Wholesale price gains hit a new high in June, surging 10.5 percent year-on-year. It was the biggest annual jump since November 1998.
Consumer prices also grew at their fastest pace in nearly 10 years last month, rising 5.5 percent in June from a year ago, the highest since November 1998.
In particular, Lee raised concerns about a wage price spiral, in which wages and prices chase each other ever upward, leading to higher inflation.
Under this vicious cycle, a rise in oil and raw material prices raises product prices, which in turn jack up labor costs. The wage increases, in turn, seeps into product prices, forcing workers to demand another hike in wages
``We are concerned about the secondary effect of rising inflation, such as a wage price spiral, in which inflation may creep into wages and increase inflation expectation,'' he said.
``Once inflation gains momentum, it can get inertia and increase inflation expectation. In particular, since the government has yet to reflect rising oil costs in public utility charges, there is also unrealized inflationary pressure,'' he added.
He said given these factors, consumer price inflation for the second half is likely to stay higher than the central bank's forecast of 5.2 percent and is not likely to fall below 4 percent next year.
``The BOK's expression of concern on inflation is to stem expectations on future inflation,'' Standard & Poor's (S&P) analyst Takahira Ogawa told The Korea Times.
``It is consistent with recent BOK and government joint-statements on intervention in the currency market,'' he added.
JP Morgan economist Lim Ji-won said, ``Since inflationary pressure has been coming from the supply side, chances are low that inflation will creep into wages. But once pressure from the demand side starts building up, inflation expectation will grow.''
During the conference, Lee said that inflation cannot be controlled with a foreign currency policy only. On Monday, the Ministry of Strategy and Finance and BOK pledged to work together to stabilize the won to control rising inflation.
The governor said that the current account is expected to post a deficit next year for the second consecutive year, if oil prices continue to hover around $130-$140 per barrel.
The central bank forecast the nation's balance of payments to be in the red by as much as $10 billion this year, the first shortfall in 11 years.