Bank of Korea’s chief reiterated that the central bank won’t rush to further raise the policy rate in sync with tightening actions in other advanced economies as inflationary pressures at home remain subdued.
“The economy is expected to grow at a steady pace, but given little price pressure from the demand side, money policy needs to stay accommodative,” BOK Governor Lee Ju-yeol said Tuesday in a ceremony marking the central bank’s 68th anniversary.
While mindful about the risks from the widening rate gap in Korea and the United States, where the tightening pace has been faster due to the strong pickup in the U.S. economy, his comment of reserve suggests the next hike may be pushed back beyond the market-expected July. “While keeping the monetary policy accommodative, we must sustain maneuvering room for the risk against imbalance (in interest rates) and take a pre-emptive response against longer-term economic developments,” he said.
The yield on the three-year government bond remained unchanged Tuesday at 2.223 percent. The yield on the five-year bond slipped 0.2 basis points to 2.497 percent.
The BOK raised the benchmark rate by 25 basis points last November for the first time in six years. It has since kept the rate steady at 1.5 percent.
If the bank decides to stay pat at its next policy meeting on July 12, the gap with the U.S. rate would further widen as the Federal Reserve is expected to raise the target range to 1.75 to 2.00 percent on Wednesday.
Lee previously said one or two rate hikes that can place the policy rate at 2.0 percent still imply an accommodative monetary policy.
Korea’s inflation rate has remained stubbornly low, rising a mere 1 percent in January against a year-ago period, its lowest in 17 months. It has since been hovering around 1.5 percent, below the bank’s 2.0 percent target.
Lee said this year’s annualized growth of 3 percent is still achievable despite the worsening job data.
Lee downplayed the danger from liquidity woes of emerging markets, citing the country’s strong fundamentals. But he said uncertainties are still high as major economies embark on a path of monetary normalization and as external trade conditions worsen from increased barriers in the U.S.
By Yoon Won-sup and Kim Hyo-jin
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