By Yoon Ja-young
The central bank may consider raising the key rate despite low inflation if the economic recovery continues, according to its governor.
“U.S. Fed Chairwoman Janet Yellen said it might be inappropriate to maintain the current (easing) policy until inflation reaches 2 percent, because a delayed key rate hike may lead to an inflation problem and hurt financial stability. We agree with this,” Bank of Korea Governor Lee Ju-yeol said at the workshop with the media last Friday.
“Although the inflation rate does not meet the target, the monetary policy should focus on the economy and the financial stability if it meets the mid-term target,” he said, when asked if the interest rate could be raised even if inflation fell short of the target.
The inflation rate this year is expected to be 1.9 percent, which is short of the central bank’s target of 2 percent.
Lee said the structural factor as well as the economic factor was behind the low inflation.
“Following the global financial crisis, low-paying jobs and employment of senior citizens have increased, weakening the link between employment and wages,” he said.
But he said the outlook did not mean the bank had changed its stance on monetary policy, pointing to the continuing uncertainties in external conditions.
“If the North Korea risk increases further, volatility will increase in financial markets and the economic sentiment may be hurt,” he said. “There is the possibility of this negatively affecting the real economy.”
Regarding foreign investors’ massive selloff on the bonds market last month, however, Lee said this was not a sign of an exodus from the Korean market.
“With rising risks of the North Korea’s nuclear threat, there was a massive selloff on Sept. 26 and 27, which could dampen the market sentiment,” he said. However, central banks and sovereign funds were showing no signs of withdrawing from the Korean market, he pointed out.
“We will closely monitor the market and take measures if necessary,” he said.
On top of the geopolitical risks, the central bank governor cited monetary policies of major economies as the most crucial factor.
“If the normalization of monetary policies comes simultaneously in major economies such as the U.S., the U.K. and Canada, this may further increase volatility in the financial markets,”he said.
He also noted that household debt had been increasing steeply despite the anti-speculation measures announced on Aug. 2, including higher tax on multiple-home owners and restriction on mortgages.
He said the central bank would monitor the effect of the comprehensive household debt control measures to be announced after the Chuseok holidays.
Regarding the currency swap between Korea and China which expires on Oct. 10, the governor said that talks with China were continuing.
Korea wants to extend the 360 billion yuan swap deal with China that works as a buffer against a foreign exchange crisis, but it remains to be seen if China will agree to an extension.
China has been taking retaliating economically against Korea for deploying a U.S. missile-defense system here to protect itself against North Korea’s nuclear threat.