[Q&A] Lee Ju-yeol "Interest rates still accommodative... Possible hike in Q1 next year"

Base Interest Rate Raised to 1.00% After 3 Months
"Possibility of Increase in Q1 Next Year Not Ruled Out"

[Asia Economy Reporter Jang Sehee] "Interest rates are still at a accommodative level. The possibility of raising the base interest rate in the first quarter (January to March) of next year remains open."

Lee Ju-yeol, Governor of the Bank of Korea, stated this at a press conference held immediately after the Monetary Policy Committee meeting at the Bank of Korea headquarters in Jung-gu, Seoul, on the 25th. He hinted at the possibility of an additional rate hike in the first quarter of next year. On this day, the Bank of Korea's Monetary Policy Committee raised the base interest rate by 0.25 percentage points to 1.00% per annum. This marked the end of the ultra-low interest rate era that lasted for one year and eight months.

The following is a Q&A with Governor Lee.

▲ Do you still consider the 1.00% annual interest rate level to be accommodative?

= There are various ways to judge whether the base interest rate is accommodative or not. Although the base rate has risen to 1.00% with this increase, considering the growth and inflation trends, it is still viewed as an accommodative level. Looking at market liquidity, although household loan volumes have decreased, liquidity remains abundant. For example, M2 (broad money supply) has maintained a double-digit growth rate for several months. Considering next year's growth and inflation trends, the current base interest rate level is seen as supportive of the real economy.

▲ The consumer price inflation forecast for this year has exceeded the Bank of Korea's price stability target. What is your view on concerns about inflation?

= The forecast was significantly raised from just three months ago (2.1%). The biggest reason is that recent international oil prices and raw material prices have risen more than expected. Additionally, demand-side inflationary pressures have increased. Major forecasting institutions generally expect international oil prices to hover around $80 next year and gradually decline. However, there are many views that energy prices will continue to rise sharply during the carbon neutrality transition process. The inflationary pressure from rising international oil and raw material prices spreading widely to other sectors is also a concern. The number of consumer price items rising more than 2% has significantly increased compared to the beginning of the year. Among these items, the proportion of core items reflecting demand-side inflationary pressure has also risen considerably. Expected inflation has also risen sharply to 2.7%. If inflation expectations become unstable, it could act as additional inflationary pressure and lead to demands for wage increases.

▲ Is there a need for additional rate hikes in January or February next year?

= The market seems to expect the rate to rise to 2% by the end of next year, but this is due to a combination of factors including the base rate and bond supply-demand issues. I believe there is still ample opportunity for communication. I do not think the possibility of a rate hike in the first quarter should be ruled out. Naturally, the first quarter remains open. The use of the term 'gradual' was to break the schematic thinking that rates would not be raised continuously this year and next. If growth remains solid while inflation and financial imbalances stay high, the possibility of a first-quarter hike should not be excluded. However, the exact timing cannot be determined.

▲ Ahead of the March presidential election next year, there are talks that raising the base rate in February might be difficult.

= Fundamentally, the base interest rate is determined by financial and economic conditions, not political considerations. Rate hikes cannot be linked to political schedules or the governor's term. It is not desirable to make political considerations.

▲ Some criticize that the pace of rate hikes is too fast.

= The Monetary Policy Committee lowered the rate unusually to 0.5% to respond to the COVID-19 crisis. Since then, normalizing the base rate according to economic conditions is very natural. In normalizing, we consider economic conditions. We prioritize economic growth and inflation in the normalization process. Recently, growth has been solid while inflationary pressures have increased; if monetary policy remains unchanged, the degree of accommodation would increase further.

▲ The government evaluates that housing prices have entered a correction phase and household loan growth is slowing. Do you think monetary policy helps financial soundness?

= Financial imbalances such as the rapid increase in household loans, rising housing prices, risk appetite of economic agents, and excessive borrowing for asset investment have accumulated over a long period. In response, supervisory authorities have continuously strengthened macroprudential policies and recently implemented these regulations more intensively. Some effects are being observed. Since financial imbalances have accumulated significantly, macroprudential policies need to be consistently pursued. In addition to macroprudential policies, if monetary policy normalizes in line with economic improvements, it is expected to have a clear effect in alleviating financial imbalances by reducing excessive borrowing for income-seeking activities.

▲ Compared to the pace and signals of the base rate hikes, household loan interest rates have risen rapidly, increasing short-term interest burdens. Could this lead to consumption contraction?

= The rise in household loan interest rates will immediately affect new borrowers with higher rates, increasing their interest burden. Since about 75% of household loans are variable rate, there will be a lag, but existing borrowers will also face increased interest burdens. Regarding concerns that reduced disposable income might constrain consumption, while such effects exist, overall, the constraint effect on the economy may not be large. Private consumption is rebounding quickly due to the normalization of economic activities and expanded fiscal support for vulnerable households.

▲ After the Monetary Policy Committee decision, both short- and long-term government bond yields fell. Was the market's concern excessive, or was communication inadequate?

= Both short- and long-term government bond yields rose in anticipation of the rate hike. The market participants adjusted their investment positions by selling bonds, which influenced the yields.

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