BOK chief nominee underlines need for rate hike in tandem with growth

Bank of Korea (BOK) Governor nominee Rhee Chang-yong speaks during a hearing at the National Assembly on Yeouido in Seoul, Tuesday. Yonhap

By Yi Whan-woo

Bank of Korea (BOK) Governor nominee Rhee Chang-yong addressed a need for additional hikes in the benchmark interest rate against soaring inflation, Thursday, stressing that rate hikes should be signaled in advance even if they are unpopular.

Speaking at a National Assembly hearing, Rhee, however, hinted at adjusting the pace of the hikes in tandem with economic growth, over concerns that tightening the monetary policy could stand in the country's path to economic recovery.

The Assembly hearing came as the BOK is increasingly urged to coordinate with the government on a policy mix of fiscal and monetary policies, amid a leadership vacuum after its former governor, Lee Ju-yeol, retired on March 31.

Rhee has been awaiting Assembly confirmation to take office since March 23 when President Moon Jae-in tapped him for the post.

“The upward trend in prices is likely to go on for at least the next year or two,” he said. “I will take into account heightened economic uncertainties and carry out a thorough review over how the risks associated with inflation and growth will unfold.”

He went onto say the rising prices are affecting consumer sentiment and that “signaling a hike is necessary even if the idea is unpopular.”

The nominee underlined that rate hikes should be made at a level that does not hurt growth momentum. Accordingly, he vowed to engineer a “soft landing” in household debt amounting to 1,862.1 trillion won as of 2021.

He called it “an inevitable, selective method for compensation” when asked about the supplementary budget being planned by incoming President Yoon Suk-yeol's transition committee.

Aimed at supporting pandemic-stricken small businesses, the budget plan fueled speculation that it will offset the effects of the rate hikes as an anti-inflation measure.

“The size of the supplementary budget has yet to be finalized, but if is considered too big and affecting prices as a result, the BOK of course should intervene by consulting relevant authorities,” Rhee said.

But he expressed concerns over the transition team's moves to ease housing regulations as part of the market-driven economy, saying, “It can bring burden on prices and any related policies should be carried out step by step.”

He said the BOK should be “cautious” when asked whether Korea has a chance to speed up its rate increases to prevent a reversal of the interest gap between Korea and the United States.

Such a gap could result from the U.S. Federal Reserve's faster-than-expected tapering, which could prompt an outflow of foreign capital from Korea.

“Korea's growth rate is not as high as that of the U.S. and we should monitor the situation in a cautious manner concerning the rate hikes.”

He warned that in addition to inflation, the aging population could pose a threat to the economy in the long term, and corresponding efforts should be made to ensure that growth does not slow down.

He said that raising the policy rate will not be enough to curb the snowballing household debt and added that a government-led taskforce should be formed to deal with the matter.