BOK to pay ‘additional attention’ to trade-offs on growth, financial stability in executing monetary policy
SEOUL– South Korea’s central bank will pay “additional attention” to implications that previous steep rate increases could have on economic growth and financial stability in carrying out its monetary policy going forward, its chief said Wednesday.
Rhee Chang-yong, governor of the Bank of Korea (BOK), told a meeting with foreign correspondents in Seoul that the central bank will execute its monetary policy “in a refined manner,” while pushing to enhance “transparency” in its communication with markets in the process.
“While ensuring price stability was the Bank of Korea’s main priority for last year due to high inflation exceeding 5 percent throughout the year, for this year, the BOK, while maintaining its focus on price stability, will have to pay additional attention to its possible trade-offs against steady growth and financial stability,” Rhee said.
“The BOK will continue to conduct its monetary policy in a refined manner while comprehensively taking into account these policy conditions and strive to enhance transparency in its communication with markets.”
Last week, the BOK hiked the benchmark interest rate from 3.25 percent to 3.5 percent, the highest level since late 2008 as it grapples with stubbornly high inflation. The rate increase marked the seventh straight one since April last year, which also represented the longest span of monetary tightening.
In a press meeting held after the rate decision, Rhee voiced worries that economic growth could slow further than an earlier projection of a 1.7 percent gain for this year, citing the possibility of a global recession and the impact of rate hikes on the overall economy.
His remarks were interpreted by some market watchers as a signal that the central bank could pause and gauge the ramifications of previous rate increases. They predict the terminal rate of the tightening that started about 1 1/2 years earlier could stop at either 3.5 percent or 3.75 percent.
During a press meeting on Wednesday, Rhee highlighted the need to closely watch the impact of the currently high rate level, saying that the future trajectory of monetary policy should depend mostly on the path of inflation.
“The rate could go higher if inflation does not fall at the pace that we expect,” he said. “If (inflation) goes down beyond our expected path, we will decide how to adjust (monetary policy) after taking into consideration growth and financial stability.”
He cited stabilizing oil prices as a short-term hopeful sign that would give the BOK “more room to wiggle” in implementing its monetary policy.
Steep aggressive rate increases have spawned worries that they could excessively cool economic growth by weakening consumption and corporate investment, while increasing the debt burden on many households that had taken out loans to tide over challenges from the coronavirus pandemic and buy homes amid the red-hot real estate market.
Rhee said the household debt will not likely cause instability in the short term, given that banks are “well capitalized” and a large part of the debt has been well collateralized with real estate under strict lending regulations.
He still raised worries over high proportions of shorter-term debt and outstanding loans with floating rates that could rise in tandem with monetary tightening.
“The structure of our household debt makes monetary policy decisions more complicated,” he said.
“As such, consumer spending and economic activity can be more sensitive to monetary tightening and to any decline in housing prices. The cumulated impact of interest rate increases could lead to an aggravating trade-off between inflation and growth, making monetary policy much more difficult.”
Source: Yonhap News Agency