BOK chief reappointment likely to speed up key rate hike

The recent reappointment of South Korea’s chief monetary policymaker is expected to encourage hawkishness at the Bank of Korea, possibly bringing forward a key interest rate hike to as early as April, despite sluggish consumption and snowballing household debt.

BOK Gov. Lee Ju-yeol met with Deputy Prime Minister and Finance Minister Kim Dong-yeon met for lunch on Monday, their first one-on-one encounter after Lee’s reappointment on Friday.

The two top officials agreed that Seoul should tighten its guard against the US Donald Trump administration’s trade protectionist gestures and the ongoing money-tightening in leading countries, according to the central bank officials.

Lee’s reappointment, which came amid burgeoning speculation for additional belt-tightening, was widely seen as the Moon Jae-in administration’s recognition of the central bank’s policy independence.

Since taking office in 2014 under the conservative Park Geun-hye administration, the 66-year-old has been known for his pragmatic approach.

In step with the previous government’s easy-money stance, the BOK chief carried out five base interest rate cuts and kept it at a record-low 1.25 percent for over a year. But he has since adopted a more hawkish stance, implementing a rate hike to 1.5 percent in November and hinting at further increases in the near future.

The US Federal Reserve’s hints that it will raise its base rate within March add to speculation of a hike to ensure the interest rate gap between Seoul and Washington is not reversed.

As Lee’s four-year term was to end in late March, observers had earlier suggested that the incoming successor may find it hard to make a drastic rate hike in April.

Now with the replacement possibility out of sight, the BOK chief is set to accelerate the widely anticipated increases.

What may hold him back, however, is the slow progress of the domestic economy, with the inflation rate remaining in the 1 percent range and household debt totaling 1.45 quadrillion won ($1.34 trillion).

“I am not so concerned about the possibility of capital outflow in the wake of a Korea-US key interest rate gap,” Lee said, following the central bank’s decision to freeze the policy rate last month.

“(The BOK) will consider not only the US rate hike but also other key economic indexes before making its forthcoming monetary policies.”

By Bae Hyun-jung (tellme@heraldcorp.com)