BOK raises growth outlook to 4%

New governor indicates rate hike in offing

The country’s top central banker Thursday hinted at raising the key interest rate to rein in growing inflationary pressure resulting from economic recovery.

“We will consider price stability, economic growth and other factors in shaping our monetary policy,” Bank of Korea (BOK) Governor Lee Ju-yeol told reporters. “We should discuss ways to take preemptive measures accordingly if the country’s gross domestic product (GDP) expansion picks up and this drives up consumer prices.”

Lee’s remarks came after the BOK froze the key interest rate for the 11th straight month at 2.5 percent, as widely expected. It was the bank’s first meeting for rate-setting since Lee took office on April 1.

The BOK also projected the country’s economic growth outlook this year at 4 percent, up 0.2 percent from its previous forecast in January. It added it will lower the 2014 consumer price index (CPI) projection from 2.3 percent to 2.1 percent. The 2015 forecast for inflation was retained at 2.8 percent.

Experts said the BOK could hike up key interest rate within this year.

“Governor Lee signaled today the BOK will not cut its policy rate just because the headline CPI is too low,” Ronald Man, an economist at Hong Kong and Shanghai Banking Corporation (HSBC), said in a report.

“Given he also said GDP growth is now expected to be near potential this year, this suggests that the policy rate may increase before year’s end.

“Our baseline scenario is for a 25 basis point rate (0.25 percent) increase to be delivered in as early as the third quarter.”

Cho Mun-bak, a senior researcher at LG Economic Research Institute, shared a similar view, although he instead forecasted the hike would come at the end the year.

“I predict the inflation rate will rise to the level of the BOK’s targeted inflation projection around November or December,” he said.

“However, the BOK will be unlikely to change the key interest rate repeatedly this year because it has been consistent in maintaining the key interest for the certain period of time as seen in the past.

“Such monetary policy will be found even under the leadership of the new chief. And I project the rate can rise up to 3 percent only at the end of the year.

Lee Jun-yeop, an economist at Hyundai Research Institute, agreed that the hike in the key interest rate is likely to take place, although he added he cannot confirm when.

“The new BOK governor is hawkish and puts priority on price stability, and it has a good chance of raising the interest rate in the future.

“However, it is possible that the demand this year will not be high enough to drive consumer price pressures, which Lee stressed as a condition to take ‘preemptive measures.’” By Yi Whan-woo The korea times