Will next BOK chief hike interest rates to counter surging oil prices, weakening won?
Shin Hyun-song, nominee for Bank of Korea governor / Courtesy of Cheong Wa Dae
Markets are closely watching whether Bank of Korea (BOK) Gov. nominee Shin Hyun-song will raise interest rates after he is confirmed, as the economy faces mounting pressure from rising oil prices and a weakening won, economists and analysts said Tuesday.
Shin, widely seen as a pragmatic hawk, is expected to lean toward rate hikes to contain inflationary pressure, though not immediately after taking office in April, they said.
"Shin is considered hawkish, but appears cautious about preemptive tightening. Early in his term, he will likely assess external conditions such as the Middle East situation and oil prices before making decisions," said Joo Won, head of research at the Hyundai Research Institute.
"It's clear the rate-cut cycle is over. While a hike will likely come at some point, the timing will be a key consideration for the incoming BOK chief," Joo added.
The analyst also said a rate hike as early as May appears unlikely, as it could undermine the government's planned 25 trillion won ($16.6 billion) supplementary budget aimed at cushioning the economic fallout from the Iran conflict.
Kim Jin-wook, chief economist at Citibank Korea, did not rule out a "hawkish" signal early in Shin's leadership.
"A hawkish signal could come as early as the Monetary Policy Board meeting in May, which Shin is expected to chair for the first time," Kim said in his report. "If he sees clear signs of inflation spillovers and loose financial conditions driven by excess liquidity, he is likely to turn toward tightening."
Kim added that Shin's nomination adds weight to Citibank's earlier forecast that the BOK may raise its policy rate by 25 basis points in both July and October.
The benchmark rate is widely expected to be held at 2.5 percent at the April 10 Monetary Policy Board meeting — the last under the current leadership of Gov. Rhee Chang-yong — as financial uncertainties stemming from the Middle East conflict persist.
Heightened focus on the new BOK chief's policy path comes as financial markets remain volatile amid the prolonged Iran crisis. In recent days, the Korean won has been hovering around 1,500 won against the dollar, sliding to its weakest position in 17 years on Monday.
Shin, an economic adviser and head of the Monetary and Economic Department at the Bank for International Settlements (BIS), was tapped Sunday to lead the central bank. He stepped down from his BIS post a day after the nomination. He will succeed Rhee, whose four-year term ends April 20.
The nominee is subject to a parliamentary confirmation hearing, though the process is widely seen as a formality, as the post does not require National Assembly approval.
In his statement following the nomination, Shin said he would "pursue a balanced monetary policy, taking into account inflation, growth and financial stability."