The Bank of Korea Unafraid of COVID-19... Confident in Economic Recovery

[Asia Economy Reporter Lee Seon-ae] An analysis has emerged that the Bank of Korea's monetary policy is unlikely to shift to tightening this year.

According to Eugene Investment & Securities on the 18th, the April Monetary Policy Committee was quite different from that of February. The monetary policy stance was noticeably less accommodative. The Bank of Korea's economic outlook became much more optimistic than before. In terms of nuance, it was closer to a hawkish tendency.

The Bank of Korea judged that an immediate shift in policy stance would be difficult. It mentioned that uncertainties such as the development of COVID-19 and vaccination remain considerably high, and it is necessary to confirm whether the economic recovery trend is settling. However, despite uncertainties and adverse factors, it forecasted that achieving an annual growth rate in the mid-3.0% range this year is sufficiently possible (February forecast: +3.0%). The reasons given were that economic indicators (exports, investment, employment, etc.) during the first quarter's three months were better than expected and are expected to continue. Concerns about financial imbalances such as the increase in household loans and rising housing prices also remain. Regarding the elevated 3-year government bond yield level, it was not greatly concerned, stating that the overall rise in loan interest rates excluding household loans was limited. This contrasts with February, when the rise in the 3-year government bond yield was described as excessive.

Accordingly, the possibility of the Bank of Korea's monetary policy shifting to tightening this year is low. The government's target for herd immunity formation is November, and uncertainties related to COVID-19 and vaccines may persist until then. The domestic economy's self-sustaining recovery power remains low, and persistent inflationary pressure is also low. There is no need to rush interest rate hikes within the year. While the market has already priced in two rate hikes, concerns about tightening are premature. In the second quarter, the 3-year government bond yield is expected to fluctuate within the range of 1.05% to 1.20%.

Researcher Yeo So-min of Eugene Investment & Securities said, "This Monetary Policy Committee showed room for the monetary policy stance to change going forward and judged that despite high uncertainty, the growth rate is on track," adding, "As the burden of financial imbalances such as the increase in household debt in the first quarter continues to be mentioned, the view that market interest rates will trend upward is maintained."

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