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(3rd LD) BOK hints at rate hike for Nov. amid economic recovery, rising inflation

Finance 13:54 October 12, 2021

(ATTN: RECASTS throughout with more details; CHANGES photo)
By Kim Soo-yeon

SEOUL, Oct. 12 (Yonhap) -- South Korea's central bank on Tuesday hinted at additionally raising the policy rate in November as the Korean economy has extended its recovery momentum, while the growth of consumer inflation remains high.

The signal came after the monetary policy board of the Bank of Korea (BOK) stood pat on the benchmark seven-day repo rate, dubbed the base rate, at 0.75 percent, as it assessed its August rate increase on the economy.

The October decision was not unanimous as two board members argued for a back-to-back rate hike.

In August, the BOK raised the key rate by a quarter percentage point from a record low of 0.5 percent as it grappled with rising inflation and the snowballing household debt. It marked the first rate hike since November 2018 and also represented the end of 15 months of record low interest rates.

Bank of Korea Gov. Lee Ju-yeol leads the bank's rate-setting meeting on Oct. 12, 2021, in the photo provided by the BOK. (PHOTO NOT FOR SALE) (Yonhap)

BOK Gov. Lee Ju-yeol said the Korean economy is on a solid recovery track despite the latest spike in COVID-19 cases, while annual inflation may be higher than the bank's earlier forecast of 2.1 percent.

"If the Korean economy remains on the current recovery path, the BOK board could consider a rate hike in November," Lee told an online press briefing. The next policy meeting is slated for Nov. 25, this year's final meeting.

The governor said despite the August rate hike, the monetary policy stance is still accommodative, noting that more actions are needed for policy impacts to become evident.

The central bank said in a statement that it will "appropriately" adjust the degree of monetary policy accommodation by taking into account virus situations, the pace of the economic recovery and inflation, as well as the scope of financial imbalances.

The October decision came amid increased market volatility caused by debt problems involving Chinese property developers and uncertainty over the Federal Reserve's tapering of its asset purchases.

The country's industrial output, retail sales and facility investment declined in August from the previous month amid the fourth wave of the pandemic.

But exports remained robust on the back of strong demand for chips and autos. Overseas shipments, which account for half of the economy, grew 16.7 percent on-year in September, extending their gains to the 11th straight month.

In August, the BOK kept its 2021 growth forecast for Korea at 4 percent despite the resurgence in COVID-19 cases as it said the surge of infections is not likely to significantly dent the economic recovery.

"Exports remain brisk despite global supply chain disruptions, and the recovery of private spending will likely accelerate if virus curbs are relaxed," Lee said.

This file photo, taken Oct. 1, 2021, shows stacks of containers at a port in South Korea's southeastern city of Busan. (Yonhap)

The BOK has taken close tabs on a build-up in inflationary pressure and the snowballing household debt, major reasons for its rate increase in August.

South Korea's consumer prices grew 2.5 percent on-year in September, compared with a 2.6 percent on-year gain the previous month, according to government data.

The country's consumer inflation rose more than 2 percent for the sixth straight month in September due largely to high prices of farm and oil products.

The BOK raised this year's inflation projection to 2.1 percent from its earlier forecast of 1.8 percent. The central bank aims to keep annual inflation at 2 percent over the medium term.

The BOK said consumer prices are expected to run at the mid-2 percent level for a while, and core inflation, which excludes volatile food and oil prices, is forecast to rise to the upper-1 percent range.

Lee dismissed the possibility of the Korean economy falling into stagflation or a mix of high prices and slumping growth, saying the economic growth remains solid.

The growth of household debt has shown no signs of letting up as more people have taken out loans to buy homes in anticipation of higher prices despite a series of government restrictions. Demand for unsecured loans also remains high amid a boom in stock investment.

Household credit reached a record high of 1,805.9 trillion won (US$1.51 trillion) as of end-June, up 41.2 trillion won from three months earlier, according to central bank data.

The financial regulator plans to soon unveil additional measures to curb the growth of household debt.

This file photo, taken Oct. 3, 2021, shows the dairy aisle at a discount store in Seoul. (Yonhap)

sooyeon@yna.co.kr
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