[The Era of Ultra-Tightening] Interest Rate Hike... Three Concerns of the Bank of Korea

US Tightening, Rising Prices, and Omicron Spread

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, and Lee Ju-yeol, Governor of the Bank of Korea, are attending the "Expanded Macroeconomic and Financial Meeting" held on the 11th at the Bankers' Hall in Jung-gu, Seoul.

[Asia Economy reporters Seo So-jung and Moon Je-won] As the Federal Reserve's tightening clock is expected to accelerate due to soaring inflation, the Bank of Korea (BOK), which sets the domestic base interest rate, has found itself in a dilemma.

Although it took preemptive measures by raising interest rates twice last year and once in January this year, the need for a precise monetary policy response has emerged due to concerns over U.S. tightening and domestic inflation. However, with the recent rapid spread of Omicron and the March presidential election coinciding, which could act as variables in monetary policy, the BOK's concerns are deepening.

On the 11th, BOK Governor Lee Ju-yeol met with Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki, Financial Supervisory Service Chairman Jung Eun-bo, and Financial Services Commission Vice Chairman Do Kyu-sang to agree on active cooperation for stable macroeconomic management amid expanding internal and external risk factors.

The BOK plans to manage liquidity with the goal of stabilizing inflation in the first half of the year, anticipating that inflation will show a "high in the first half, low in the second half" trend this year due to rising international oil prices and global inflation expansion. The BOK will focus on stable management of expected inflation and core inflation through macro-level responses and micro-level stabilization measures such as government adjustments to oil taxes.

Considering the recent sharp rise in government bond yields, the BOK will also pursue additional simple purchases of government bonds and adjust the monthly issuance volume of monetary stabilization bonds. Through this, it plans to minimize pressure factors such as loan interest rate hikes caused by rising government bond yields. The BOK and the Ministry of Economy and Finance emphasized, "We will closely cooperate to ensure that fiscal, monetary, and financial policies operate as a mutually complementary optimal policy mix."

However, the problem is that if the supplementary budget is increased as demanded by the political circles despite the BOK's interest rate hike moves, the tightening effect could be diluted. In other words, it is a dilemma of tightening the money supply on one hand while loosening it on the other.

To stabilize government bond market yields, the BOK undertook a simple purchase of government bonds worth 2 trillion won on the 7th, but the 3-year government bond yield closed at 2.303% on the 8th, surpassing 2.3% for the first time in 3 years and 9 months.

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