Key focus: Rhee speaks during a television interview in Seoul. The BoK governor has said that a hike in interest rates would also be an option if borrowing can’t be tamed with other tools. — Bloomberg
SEOUL: The Bank of Korea (BoK) will probably keep interest rates elevated for another year to ensure inflation is brought under control, a former board member says, warning markets against rallying on premature expectations for a policy easing.
“Higher for longer is inevitable. It is likely to stay that way and should stay that way,” Lee Seung-heon, a former BoK senior deputy governor, said in an interview last Friday.
“Market participants should keep the door open to the possibility of inflation accelerating. They shouldn’t just jump back in with everything.”
Inflationary pressures are at the most stubborn in decades, and there is no evidence they are easing for good, said Lee, who retired in August after a three decade-long career at the bank.
The Israel-Hamas conflict threatens to add sharply to price pressures, and the high base of last year’s readings needs to be considered when interpreting any data showing an easing of inflation going forward, he said.
Lee’s comments contrast with optimism in markets after Federal Reserve (Fed) chairman Jerome Powell hinted last week the US central bank may now be finished with the most aggressive tightening cycle in four decades. Powell still said there’s a long way to go before inflation slows to the Fed’s target of 2%.
South Korea’s price growth accelerated to 3.8% from a year earlier last month, running counter to the BoK’s prediction that it would slow from September’s gain of 3.7%.
Following the data, the BoK signalled it could revise its inflation forecast higher while the Finance Ministry warned the chance of another hike in the United States shouldn’t be ruled out.
“How long is more important than how high,” Lee said.
“Without inflation under control and monetary stability in place, everything could fall apart.”
The BoK has stayed pat on policy since raising rates in January, with growing emphasis on safeguarding economic momentum.
The hold came after a rapid series of hikes last year to keep up with the Fed’s tightening and followed increased market tumult that was partly behind the default by a Legoland Korea developer.
“It felt like we were barely breathing with our necks just above water,” Lee said, recalling emergency steps authorities took to ease the turmoil and pointing to the crisis as a key reason the BoK slowed its pace of tightening.
Investors faced another scare in July this year when a bank run occurred at a branch office of a credit union, prompting financial regulators and the central bank to step up efforts to support troubled lenders.
While those risks have largely calmed, household debt remains at the heart of the credit problem.
South Korea’s household debt-to-gross domestic product ratio remains above 100%, one of the highest in the world.
BoK governor Rhee Chang-yong has pledged efforts to lower it gradually, and added that a hike in interest rates would also be an option if borrowing can’t be tamed with other tools.
Lee, the former No 2 at the bank, said a year of “higher for longer” is not only likely but also an opportunity for policymakers to encourage de-leveraging among households.
The BoK’s rate at 3.5% is the highest since 2008. Rhee said last month policy would remain restrictive with the focus on inflation for a considerable time.
“Markets need to believe he’s not bluffing,” Lee said. “Central banks were created to bring inflation under control and they take this mandate more seriously than anyone might think.” — Bloomberg
