Monetary Policy
The Bank of Korea Governor Lee Ju-yeol remarked on June 12 that the central bank may adjust the degree of its expansionary monetary policy if economic conditions keep getting better to a significant extent. This is the first time that the central bank governor made a comment to that effect. It can be regarded as a kind of signal for allowing financial market participants to be prepared for a rise in base rate.
The Bank of Korea has maintained a record low base rate of 1.25% since June last year. The recent change in its stance has to do with the fact that an upward pressure is mounting both at home and abroad these days.
The U.S. Federal Reserve is expected to raise interest rates by 0.25 percentage points to 1% to 1.25% a year at its FOMC meeting scheduled for June 13 and 14. The Fed is likely to do so again before the end of this year, and this means investors may flock to the United States from South Korea for a higher interest rate.
At the same time, the South Korean economy is showing some recovery nowadays, led by export and investment alike. Specifically, South Korea’s exports continued to increase for seven months in a row until last month with international trade conditions improving and sectors such as semiconductor leading the growth. If the South Korean government’s supplementary budget for job creation shows positive effects, the growth of the South Korean economy can reach 2.7% to 2.9% this year to exceed previous expectations. The Bank of Korea recently released an estimate for this year of 2.6% and is likely to raise it next month.
Still, the central bank is not completely free from concerns over household debts, which amount to no less than 1,400 trillion won. In this regard, some experts are predicting that the central bank will begin to discuss a rise in base rate in earnest after the government comes up with household debt measures in August and they are found to be effective.