BOK likely to raise key rates in July
BOK Governor Lee Ju-yeol responds to a question after the country's central bank increased its benchmark key lending rate to 1.5 percent in April this year, in this file photo. Korea Times file
By Kim Yoo-chul
The Bank of Korea (BOK), the country's central bank, is almost certain to raise its benchmark lending rate in July given the recent subdued inflation, economists and leading investment banks said.
While the bank's governor Lee Ju-yeol recently clarified the BOK accommodation should be eased when “various conditions match up,” they are weighing on the continued “under-controlled” inflation as the primary reason to phase out the rate hike timing from the second quarter of this year to the third quarter.
“One more rate hike is expected in the third quarter of this year as inflation pressures will remain contained,” Morgan Stanley, a leading investment bank, said in its research note, Monday.
One economist at another U.S.-based investment bank operating in Seoul was more outspoken by weighing the probability of a July rate increase with 25 basis points to 1.75 percent. He declined to be identified as he isn't authorized to officially speak to the media.
But the July possibility is in accordance with the bank's internal schedules not from the result of “third-party” external factors. BOK said it “should raise” its rate when it becomes possible to do so.
“We believe inflation pressures are likely to be limited as a still negative output gap would likely curtail any demand-pull inflationary pressures. Overall, Korea's high indebtedness means any rate hike cycle is likely to be swallowed and Korea's sizable current account surplus mean that its monetary policy stance doesn't need to be in tandem with that of the United States,” said Morgan Stanley.
With some economists saying the Federal Reserve's (Fed) push to hike its rates, continuously, would make Korean assets less attractive, the BOK Governor Lee remained “quite confident” to offset the effects from the Fed's policy changes.
The governor said the BOK doesn't need to respond automatically to U.S. policy changes. Even if the benchmark rates fall below the Fed's, the BOK is still maintaining its view that the bank doesn't expect “large capital outflows.” The Fed is expected to raise its rate in June.
For job data, another key factor for rate increases, it's not obvious how wage growth could be sustained at the recent momentum if employment growth doesn't pick up further. Rather, with the export recovery driven to a large extent by semiconductors, a broad-based spillover to the labor market has been absent.
“If inflation stays below the 2 percent target, any further delay in BOK tightening would reduce the likelihood of it actually happening,” said Morgan Stanley.
HSBC also expects the BOK will hike its rates to 1.75 percent in July, given the taming of the consumer price index. The bank will follow up with another hike within the first half of next year.
More importantly, HSBC expects consumer momentum to improve “gradually,” as a narrow recovery in exports means there is still no broad-based recovery in employment conditions.
Separately, the BOK named a former JP Morgan senior economist Lim Ji-won as a member of its monetary policy board.
“She's outspoken and prefers to pursue pre-emptive measures in dealing with macro-economic issues. Looking at the bank's monetary policy from different viewpoints is always good,” said an official.