Lee Ju-yeol "This Year's Growth Rate Will Exceed 3.0%... Interest Rate Hike Not Yet"

Maintaining Monetary Policy Easing Despite Higher Growth and Inflation Forecasts
Resembling Remarks by US Fed Chair Powell and Others

Lee Ju-yeol, Governor of the Bank of Korea [Image source=Yonhap News]

'Q&A with Governor Lee Ju-yeol on Key Issues'

Inflation Rate Expected to Exceed Forecast (1.3%)

"Low Likelihood of Prolonged Inflation Expansion"

"Monitoring Fed Monetary Policy and Market Volatility Closely"

[Asia Economy Reporter Kim Eun-byeol] Lee Ju-yeol, Governor of the Bank of Korea, stated that this year's economic growth rate is expected to surpass the initial forecast of 3.0%, and the inflation rate is also likely to exceed 1.3%. He suggested that the pace of economic recovery could be faster than expected due to vaccine distribution and supplementary budgets. However, he noted that it is not yet time to advance the timing of the base interest rate hike based on this.

On the 24th, Governor Lee, in a written Q&A session with reporters on 'Key Issues,' said, "Although uncertainties remain regarding the future growth path, the domestic growth rate this year is expected to be higher than the previous forecast," adding, "Exports and facility investment are expected to increase more than anticipated, and if the supplementary budget under discussion in the National Assembly is executed, it will act as an additional factor to raise this year's growth rate."

Growth Rate Expected to Exceed 3.0%... Interest Rate Hike Not Yet

With the expansion of vaccine distribution, expectations for global economic recovery are rising, and the confirmation of large-scale additional fiscal stimulus in the U.S. along with continued expansionary macroeconomic policies in major countries are among the domestic and international conditions that have led to the upward revision of the growth rate forecast. As the Bank of Korea also raised its growth forecast, a growth rate in the 3% range for Korea this year is becoming a foregone conclusion. Previously, the government forecasted a 3.2% growth rate, and the International Monetary Fund (IMF) projected Korea's growth at 3.1%. The Organisation for Economic Co-operation and Development (OECD) raised Korea's growth forecast by 0.5 percentage points to 3.3% on the 9th (local time).

However, Governor Lee noted, "The degree of economic recovery is expected to be significantly influenced by the development of COVID-19 and the status of vaccine distribution," citing the global semiconductor market and U.S.-China trade conflicts as major variables.

Although the growth rate is expected to exceed forecasts, he viewed that real economic activity has not yet fully returned to a normal trajectory after the COVID-19 shock. Amid accumulating household debt and rising asset prices?side effects of ultra-low interest rates?there are opinions that the pace of growth is faster than expected and that the timing of tightening monetary policy could be advanced, but he said it is not yet the time. He explained, "There may be opinions that the timing of the monetary policy stance shift could be brought forward," but "since real economic activity has not reached its potential level, it is difficult to say that our economy has returned to a normal trajectory after the COVID-19 shock, so at present, it is not considered appropriate to hastily adjust the policy stance."

Inflation Rate Also Expected to Exceed Forecast (1.3%)... "Inflation Will Not Persist"

Governor Lee also expects this year's consumer price inflation to surpass forecasts but indicated that it is not expected to be a sustained inflation. He said, "In the second quarter, due to the base effect from last year's sharp decline in international oil prices, inflation may rise to the high 1% range, and in the second half, it will fluctuate mostly around the mid-to-high 1% range," forecasting that the annual inflation will be higher than the previous forecast (1.3%). However, "consumer price inflation is still expected to remain below the price stability target level of 2%, and it is expected to continue in the 1% range next year," adding, "Based on the inflation outlook, it is not a situation where monetary policy should respond to concerns about expanding inflation risks at this time." Regarding market concerns about inflation, he also stated, "Inflation may temporarily rise, but the possibility of it continuously expanding is not high."

Governor Lee's remarks align with those made last week by Jerome Powell, Chair of the U.S. Federal Reserve (Fed), following the Federal Open Market Committee (FOMC) meeting. While the U.S. sharply raised its growth forecast from 4.2% to 6.5%, it maintained its stance to keep policy rates unchanged until employment and inflation reach targets. This reflects agreement that accommodative monetary policy is necessary until the real economy shows significant recovery.

Persistent Doubts About Early Rate Hikes... Lee Ju-yeol: "Monitoring Fed Monetary Policy and Market Volatility Closely"

However, the market harbors skepticism about the central bank's announcement to maintain accommodative monetary policy despite raising growth and inflation forecasts. Although there is a firm commitment to continue monetary easing for now, if the recovery accelerates, the timing of the base interest rate hike could be advanced. Governor Lee said, "Among market participants, there is a prevailing expectation that the timing of asset purchase tapering or rate hikes could be somewhat earlier than what the Fed has indicated," and "depending on the direction of various upcoming economic indicators, market expectations regarding Fed monetary policy will be frequently adjusted, which could increase financial market volatility, so monetary authorities are vigilant and monitoring closely."

Meanwhile, Governor Lee expressed the opinion that support for financial intermediary loans to encourage commercial banks to lend to small and medium-sized enterprises should continue, given that the real sector is still affected by the COVID-19 shock.

He said, "Since March last year, through financial intermediary support loans, a total of 16 trillion won has been temporarily provided to small business owners and SMEs struggling due to the spread of COVID-19," adding, "I believe the positive effects have been quite significant." This support improved financial accessibility and reduced interest burdens for small business owners and SMEs affected by COVID-19, complemented the effects of interest rate policy, and partially mitigated the negative impact of the COVID-19 shock on financial markets and the economy. Therefore, he emphasized, "Considering the ongoing difficulties faced by vulnerable small business owners due to the continued spread of COVID-19, I think it is necessary to continue support for the time being to help them overcome this temporary crisis."

This content was produced with the assistance of AI translation services.