Korea to lead Asia’s rate-hike cycle as Lee flags 2021 move

Bloomberg

The Bank of Korea (BOK) once again looks set to spearhead Asia’s first interest-rate hikes, after Governor Lee Ju-yeol said policy normalisation is in the pipeline this year, triggering a recalibration of market bets.
As pandemic-era stimulus runs the risk of inflating asset bubbles and spurring more volatility in capital flows across the region, several central banks have stressed the need to rein in ultra-loose policy. China has started to curb credit growth, while New Zealand sees a rate hike next year.
Speaking at a briefing following the release of a semi-annual report on inflation, Lee said the BOK’s current record low interest rate of 0.5% was “significantly accommodative” and that normalisation will start “at an appropriate time this year.”
Korea was also in the vanguard of policy normalisation in 2017, though at that time it followed Federal Reserve rate hikes. This time it looks on track to move before the US.
“Markets now seem to be looking at a rate hike as early as in October for sure, and they’re weighing if there’s chance for a hike even in August,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities Co. “That means the three-year yield may edge up above 1.42%, which is what I had initially forecast as the cap for this year,” he said.
Korea’s short-term bonds dropped following the more specific time line from the governor. The central bank has signaled in recent weeks a likely transition to a reining in of pandemic-era stimulus, but the governor had until now refrained from directly mentioning that a move would come this year.
Three-year bond futures dropped as much as 18 ticks to 110.12, while the yield on the same tenure bond advanced
5 basis points to 1.38%, the
highest since January 2020.