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BOK gov. hints at rate increase

If Korea hits economic targets, loose monetary policy could change
June 20,2018
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Bank of Korea (BOK) Gov. Lee Ju-yeol indicated Tuesday that the bank could raise interest rates in the future if the country hits its inflation and economic growth targets.

“The accommodative monetary policy stance needs to be adjusted if consumer prices hit the inflation target and economic growth continues in line with the potential growth rate,” said Lee. The comment could be seen as indicating that the BOK is moving toward another interest rate rise, since he went on to note that Korea is on the right track in terms of growth and inflation. It last raised interest rates in November.

“It appears that the Korean economy has grown in accordance with its potential growth based on the recent economic indicators … current consumer prices remain below the inflation target, but they are expected to increase in the second half of this year, especially in the fourth quarter,” he said. Korea’s consumer price growth has not yet reached the target inflation of 2 percent, as the latest reading, in May, was 1.5 percent.

Lee also said that the central bank will factor in economic fundamentals, such as growth and inflation, more than potential risks from capital exodus to decide its key interest rate in the future. The U.S. Federal Reserve increased the key rate range by a quarter of a percentage point to 1.75 percent to 2 percent earlier this month, which widened the gap with Korea’s benchmark rate, which is 1.5 percent.

The governor highlighted economic uncertainties and economic unrest in emerging markets, alongside a grim job market at home. “The fears about a faster-than-expected interest rate hike in the United States unsettled emerging economies with weak economic fundamentals,” he said.

The Korean economy was far from being immune to such turbulence as it affected the Kospi index and foreign currency markets.

Korea’s main bourse, the Kospi, hit a nine-month low on Tuesday to close at 2,340.11, down 1.52 percent from the previous trading day. The won also sharply depreciated against the dollar, as the local currency has closed above the 1,100 won mark since Monday.

Park Jeong-woo, analyst at Korea Investment & Securities, said that the rising foreign currency rate will stabilize going forward, because the lower won is affected by short-term factors.

“The higher foreign currency rate came as the eased geopolitical risk, a factor that offsets a strong dollar, was removed in the short term,” said Park Jeong-woo, an analyst at Korea Investment & Securities. “The hawkish stance from the June Federal Open Market Committee meeting also helped strengthen the dollar.”

Korea’s job market is facing trouble as the country has seen the fewest number of new jobs created in more than eight years, while the May youth unemployment rate reached an all-time high.

As for the job market, the country is seeing the fewest number of jobs it has in more than eight years, while the youth unemployment rate for May reached an all-time high. The total number of employed stood at 27.06 million in May, up by 72,000 over a year ago. This was the lowest increase in eight years and four months.

Despite the headwinds both at home and abroad, Lee was confident about the country’s economic resilience and fundamentals, citing Moody’s, which again gave Korea a double-A 2 rating on Monday.

“South Korea’s large and diversified economy will continue to demonstrate resilience to global shocks,” the global rating agency said. “Geopolitical risk owing to historical tensions versus North Korea has ebbed, but remain elevated; and South Korea’s public finances will remain sound and are further enhanced by ongoing implementation of structural reforms.”


BY PARK EUN-JEE [park.eunjee@joongang.co.kr]