Dovish Governor Debuts With No Rate Hike Signal

Rate Increase Not Likely to Come Until 3rd Quarter

By Kim Jae-kyoung, Lee Hyo-sik

Staff Reporters

The nation's top central banker made his debut Friday on the financial market by maintaining the long-held decision not to alter monetary policy, sending no signals that it will shift course in the near future.

Bank of Korea (BOK) Governor Kim Choong-soo decided to keep the key interest rate untouched at the record low level of 2 percent for the 14th consecutive month.

The rate has been frozen since March of last year, putting the brakes on a monetary easing cycle that trimmed it by 3.25 percentage points since October 2008 in the aftermath of the global financial crisis.

After presiding over the central bank's monetary policy committee meeting for the first time, Kim, who took the helm from his outgoing predecessor Lee Seong-tae on April 1, said that the private sector's self-sustaining recovery is vital for a rate hike.

``The self-sustaining rebound of the private sector should come first before the rate is raised. We will make decisions on how to help the economy grow at a steady and sustainable pace,'' Kim said, indicating the central bank will not raise the interest rate for some time.

Market analysts said that Kim repeated nearly the same views as his predecessor Lee Seong-tae except for some minor modifications in the official statement.

The latest comments did include a separate analysis of the global economy and a new phrase, ``…taking into overall consideration financial and economic conditions domestically and abroad."

``In our opinion, this is more rhetoric than a signal. The key wording, we think, is still the use of "for the time being," which we believe hints that the BOK will not hike rates at its next meeting on 12 May either," Nomura Securities economist Kwon Young-sun told The Korea Times.

The BOK had been widely expected to freeze the rate at the record low level, given Kim's economic philosophies and close ties with President Lee Myung-bak and senior policymakers. In a meeting with Strategy and Finance Minister, Yoon Jeung-hyun Monday, Kim pledged to increase policy cooperation with the finance ministry.

``There were no surprises at the central bank. Kim was widely expected to keep the interest rate at the current level. But he is not as dovish as I had previously thought. He stressed a BOK role and talked more about monetary policy principles. I had expected the bank to start raising the rate either in the fourth quarter of the year or early next year. But the timing could come sooner, given his remarks Friday,'' LG Economic Research Institute Chung Sung-tae said.

When Will Rate Hike Begin?

Since Kim showed his meek stance at his first press conference, market analysts forecast that a rate rise will not come until the third quarter of this year.

"Overall, we interpret the tone of his language as passive. Future monetary policy should be data-dependent. We expect the BOK to move late, with a first 25bp rate hike in September," Kwon of Nomura said.

Standard Chartered First Bank chief economist, Oh Suk-tae said that the central bank should start raising the rate this year.

``I'm not quite sure whether the point to raise interest rates is now. But I think that the BOK may have to raise interest rates within the year as a pre-emptive action to avoid any undesired side-effects of a low interest rate policy," he said.

``I expect that the BOK will start to raise interest rates in the third quarter of this year," he added.

Economic Hiccups

In the meantime, the BOK chief also said Asia's fourth largest economy has been growing at a steady rate on the back of a global economic recovery. ``But the construction sector here still remains in a deep slump.

Also, the nation's job market has failed to rebound as fast as previously expected. We should take preemptive measures to cope with the imminent strengthening of the Chinese yuan because the revaluation could have significant repercussions for the Korean economy.''

Kim said consumer prices remain largely tamed, adding that even if the inflationary pressure builds up in the second half of the year or early next year, now is not the time to be concerned about inflation.

``Korea will post a current account surplus in 2010. But its size will shrink sharply from last year. The growing household debts are largely due to a rise in mortgages taken out by upper-and middle-class families. But thanks to expanding financial assets, household finance has not yet reached a dangerous level,'' the BOK head said.