Lee Ju-yeol Hints at 'Interest Rate Hike Within the Year'... Securities Industry Says "Possible in November"

The Era of Ultra-Low Interest Rates Ends... Lee Ju-yeol Hints at Rate Hike in Second Half
Stock Market Expects One Rate Increase in November This Year

[Asia Economy Reporter Kim Eunbyeol] As the Bank of Korea recently mentioned the possibility of multiple interest rate hikes, the securities industry is also moving up its forecast for the timing of rate increases. In particular, with Lee Ju-yeol, the Governor of the Bank of Korea, directly mentioning the possibility of a rate hike, both academia and the market have shifted toward placing more weight on a rate increase within this year. It is interpreted that if the Bank of Korea raises rates this year, it is not so much out of concern for a sharp rise in inflation, but rather a result of greater consideration for financial stability issues such as the surge in household debt due to low interest rates and the rise in real estate and stock prices.

On the 12th, Gong Dong-rak, an analyst at Daishin Securities, said, "The Bank of Korea, which has maintained a accommodative monetary policy stance during the COVID-19 pandemic, is expected to raise the base interest rate within this year," adding, "This reflects concerns about financial imbalances that could accumulate due to the prolonged low interest rate environment."

Governor Lee stated in his speech commemorating the 71st anniversary of the Bank of Korea yesterday, "If our economy is expected to continue a solid recovery, we must orderly normalize the current accommodative monetary policy from an appropriate time going forward." He also identified monetary policy normalization as a key task for the second half of the year. This effectively hinted at the possibility of a rate hike within the year, showing a clearly hawkish (monetary tightening preference) stance compared to his remark after the Monetary Policy Committee meeting at the end of last month that "the accommodative stance will be maintained for the time being."

Regarding this, analyst Gong said, "Governor Lee's remarks suggest a possible change from the rate cuts and aggressive monetary easing measures taken after COVID-19," and "Therefore, we intend to revise the expected timing of Korea's base rate hike from next year to the fourth quarter of this year." However, even if rates are raised this year, he expects it to be only once, forecasting Korea's base rate at 0.75% by the end of this year. The specific timing of the rate hike is expected to be in the fourth quarter (November) of this year. After the rate hike this year, additional rate increases are expected to occur with a gap of more than six months. Since Governor Lee's term is scheduled to expire at the end of March next year, and with events such as the presidential election, it is anticipated that it will not be easy to implement further rate hikes.

Analyst Gong explained that Governor Lee's focus on financial stability when hinting at the possibility of a rate hike is also the reason for the considerable time gap before a second rate increase. Financial stability measures are most effective when combined with policies other than monetary policy, so the pace and coordination with other policies must be aligned.

Lee Ju-yeol, Governor of the Bank of Korea [Photo by Yonhap News]

In his commemorative speech, Governor Lee also addressed the side effects of ultra-low interest rates, which he had relatively avoided mentioning before. He stated, "Bold economic stimulus measures unprecedentedly implemented by governments and central banks worldwide have greatly helped overcome the crisis, but it is also true that imbalances between sectors and social strata have widened in the process."

He added, "Economic agents' risk-taking tendencies have increased, causing asset prices to rise rapidly compared to the real economy, resulting in intensified asset inequality," and "The scale of private debt has greatly expanded, and recently concerns about global inflation have also increased." The Bank of Korea's forecast for this year's annual inflation rate is 1.8%, expected to approach the inflation stabilization target of 2.0%. Experts believe that although inflation has recently risen, it is likely to peak this year and slow down next year.

Researcher Oh Seok-tae of Soci?t? G?n?rale also moved up the Bank of Korea's first rate hike timing from the first quarter of next year to the fourth quarter of this year. In a report published yesterday, Oh forecasted an earlier rate hike based on Governor Lee's hawkish remarks.

He judged, "Governor Lee's remarks reflect concerns about financial imbalances such as rising asset prices and increasing private debt, and it appears that policymakers have plans for rate hikes." He expects the first rate hike to occur in November and anticipates four rate hikes per quarter next year, totaling 100 basis points (1bp = 0.01 percentage points), which could raise the base rate to 2.00% by early 2023.

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