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Bank of Korea under pressure to hike key rate
Bank of Korea Governor Lee Ju-yeol. Korea Times file
By Lee Kyung-min
By Lee Kyung-min
The Bank of Korea (BOK) is coming under growing pressure to raise its key interest rate after the U.S Federal Reserve repeatedly hinted that it would withdraw from its ultra-accommodative monetary policy.
An immediate rate hike is unlikely at the upcoming rate-setting meeting scheduled for May 27, since uncertainties remain over the slower-than-expected COVID-19 vaccination rate in Korea and private consumption falling behind a rapid rebound in exports and investments.
The key rate has remained at a record low of 0.5 percent.
Yet the record-low borrowing cost will be raised primarily due to calls to curb snowballing debt and alleviate inflation fears, which is why discussions on a rate hike are expected to materialize in the latter half of this year. Also playing a role will be a politically-driven increase in fiscal spending ahead of the presidential election next year.
Minutes of the U.S. Federal Open Market Committee meeting published Wednesday (local time) showed a number of participants suggesting that “it might be appropriate at some point” to begin discussing plans to adjust the pace of asset purchases.
It is possible that such discussions could occur if the U.S. economy continues to make rapid progress toward the Committee's goals, according to the minutes.
The officials pledged to continue buying $80 billion (90 trillion won) in Treasuries and $40 billion in mortgage-backed securities every month until “substantial further progress” is seen on their employment and inflation goals.
“Despite the expected short-run fluctuations in measured inflation, many participants commented that various measures of longer-term inflation expectations remained well anchored at levels broadly consistent with achieving the Committee's longer-run goals,” according to the minutes.
Seoul National University economist Kim So-young said Korea's central bank will need to factor in the Fed's decision in the upcoming rate-setting meetings.
“The economy is showing signs of a recovery as evidenced by robust exports and investments. The case for a drawdown in the current expansionary monetary policy will be strengthened, not immediately, but before the year's end definitely,” he said.
The Korean currency closed at 1,127.0 won against the U.S. dollar on Friday, down 5 won from the previous session. The yield on U.S. 10-year Treasury bonds fell to 1.6320 percent with Korea's 10-year Treasury bonds also falling to 2.123 percent.