BOK chief gives clearest-yet signal of a rate hike within the year, bond prices fall

[Photo by Bank of Korea]

The base rate should be “normalized not too late within the year,” said the chief of the South Korean central bank in the clearest heads-up of a hike from the record low of 0.50 percent.

‘Orderly normalization in monetary policy must take place not too late within the year,” said Lee in briefing on the Bank of Korea’s regular goal on stabilizing consumer prices

Since last month, Lee has been building up rationale for a tightening with equivocal mention about ‘timely and orderly’ adjustment in present loose policy on May 11 and that a hike would hinge on economic performance in the second half in a briefing after the monetary policy meeting on May 27 that kept the rate unchanged for a yearlong after back-to-back cuts to record low level amid Covid-19 outbreak,.

He pointed to “decisive capital concentration in the asset market and unfazed rise in household debt.”

“There is a need for the adjustment in the monetary policy to respond to the deepening financial imbalance.”

“The BOK’s primary role is to stabilize consumer prices and interest rates. But if we neglect response to financial imbalance, negative ramifications on the economy and prices are inevitable. We must engage policy in view of not just prices, but also financial stability and financial imbalance.”

Bond prices fell sharper on the shorter curve on anticipation of a rate hike in coming months.

The three-year government bond yield rose 3.9 basis points to 1.377 percent and the five-year bond yield 2.5 basis point to 1.702 percent. The longer-dated bond yields fell slightly on profit-taking.

Since there are four policy sessions left in the year, the market anticipates a hike in October after further readying the market. The next policy meeting is on July 15.

The central bank projected Thursday that inflation would remain at around 2 percent in the second half of the year on the back of the fast economic recovery and strengthening demand-side pressures.

For the next year, the BOK estimated inflation to fall around 1.5 percent due to the weakening supply-side factors such as the prices for agricultural, fishery and livestock products and oil prices.

[ㄏ Maeil Business Newspaper & mk.co.kr, All rights reserved]