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Bloomberg
South Korea became the first major Asian economy to raise interest rates, with more hikes in the pipeline as its central bank indicated that financial risks pose a bigger threat to the economy than the latest virus outbreak.
Governor Lee Ju-yeol said the quarter-percentage-point hike to 0.75% still left rates in an accommodative position that supports the economy. He added that the current delta wave is having less of a negative impact on growth as consumers adjusted behavior to the new normal of the pandemic.
Policy adjustments over the coming months would be gradual, with the timing of the next move taking into account Covid-19 developments, financial imbalances and moves by other central banks including the
Federal Reserve, he said.
The move shows the focus of monetary policy in Korea has pivoted from propping up the economy to curbing a debt-driven asset bubble. Lee’s comments will give central bankers, investors and market watchers food for thought as they await Fed chair Jerome Powell’s Jackson Hole speech for clues on how and when the US might shift its policy.
“We’ve decided to put the focus on reducing financial imbalances, and as we raise the rate, we are embarking on a process of normalizing policy in line with economic recovery,†Lee said. The BOK “won’t either rush or hesitate†in raising rates further, Lee said, adding that the Fed moves are a “particularly†important factor in policy considerations. South Korea’s bond futures reversed earlier losses to rise as Lee said board member Joo Sangyong voted against the decision, tamping down bets for a back-to-back hike at the next meeting in October.
In line with Lee’s view that the economy would hold up under the latest surge of virus cases, the BOK kept its growth forecast for the year at 4%, expecting consumption to improve along with rising vaccinations and an extra budget, while exports and investment remained strong. But it also raised its inflation outlook above its target to 2.1% and highlighted accelerating household loan growth.