By Kang Seung-woo
Staff reporter
Bank of Korea (BOK) Governor Kim Choong-soo strongly indicated an upcoming key rate hike after having kept it at 2 percent for the 16th straight month.
"BOK plans to manage the monetary policy in a way to help support the solid growth on the foundation of price stability," Kim said in a forum held in Seoul.
"If the current accommodative policy stance is prolonged, however, it could bring about risks of inflation and an increase in asset prices," Kim said.
He also said the eurozone debt crisis could add downside risks on the outlook for the global economy. The BOK needs to take these two aspects into consideration.
Kim followed Finance Minister Yoon Jeung-hyun, who said Korea could face a faster-than-expected price hike in the latter part of this year Friday.
It is the first time that the central bank chief directly mentioned the risk of inflation, although he has talked about growing inflationary pressures, which is interpreted as a signal that the government is preparing for an exit strategy from the current pump priming.
Market analysts said that a series of comments on inflation indicate that a rate increase will take place in the coming months.
"Talking of prices on and on would mean an interest rate rise is forthcoming," said Park Tae-geun, a fixed-income analyst of Hanwha Securities. "He is giving a signal about a rise in interest rates in the second half of the year."
Meanwhile, Kim said that the possible appreciation of the Chinese currency is likely to push the won upward.
The People's Bank of China (PBOC) announced Sunday that it would end the 23-month fixed pegging of the yuan, allowing for more flexibility in the currency in response to the global economy's continuing recovery.
The Chinese central bank has pegged its currency, also known as renminbi, to the greenback, keeping its value artificially low since mid-2008, when the global financial crisis loomed.
"The yuan appreciation will likely turn up the pressure on the won. But the won's rise is not likely to be stiff as the market has already anticipated such a move," Kim said.
"External environments, including a possible appreciation of the Chinese currency, are changing. (South Korea) needs to take heed of external economic factors," he said.