Admitting to thinning maneuvering room in monetary policy, the Bank of Korea (BOK) would carefully weigh the risks from private-sector debt and capital flight when raising interest rates against tightening in the United States, said BOK Governor Lee Ju-yeol on Monday as he started his second four-year term.
“We must secure ways to increase policy ammunitions in mid and long-term perspective against declining growth potential and reduced scope in rate policy maneuvering,” Lee told reporters after the inauguration ceremony.
Lee made a rare precedent of earning a second term for the first time since the BOK gained sovereignty in rate decisions.
“The monetary policy must be operated to ensure stability in the financial system and maintain growth momentum for the economy,” he said.
The challenge would be to fend off potential risks to the financial market and system from capital flight due to widening interest rate gap between the U.S. and Korea, and the colossal household debt load that could shake if rates go high too fast.
Last month, U.S. Federal Reserve delivered another quarter-point hike to place the policy rate target at 1.50 percent to 1.75 percent. Korea’s benchmark rate has been set at 1.50 percent since November when the BOK delivered its first hike in more than six years.
Stubbornly-lethargic domestic demand and alarming household debt of 1,451 trillion won ($1.37 trillion) as of December have kept the BOK from taking preemptive rate actions.
Lee in a confirmation hearing to the parliament indicated that the economy could afford two hikes against four anticipated increases in the U.S. this year.
The markets shrugged off an increase in next week’s policy meeting upon subdued March inflation data released on Tuesday. The consumer price index slowed further from the previous month to gain 1.3 percent in March against a year-ago period.
The three-year government bond yield finished Tuesday 3.2 basis points lower at 2.193 percent and the five-year bond 0.9 basis points lower at 2.634 percent.
By Kim In-oh and Cho Jeehyun
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