Lee Ju-yeol "This Year's Growth Rate Expected to Exceed Inflation Forecast"
Growth Rate Expected to Surpass 3%, Inflation Rate 1.3%
"Not the Time to Rush Interest Rate Hikes Amid Inflation Response"
[Asia Economy Reporter Kim Eun-byeol] Lee Ju-yeol, Governor of the Bank of Korea, predicted that this year's economic growth rate and inflation rate will exceed the forecasts released on the 25th of last month. However, he stated that inflation risks are not significant, and considering the growth rate and inflation, it is not yet time to hastily raise interest rates.
In a written Q&A with reporters on the 24th regarding 'major current issues,' Governor Lee said, "Although uncertainties remain, this year's domestic growth rate is expected to be higher than the previous forecast (3.0%). The increase in exports and facility investment is expected to be higher than anticipated, and if the supplementary budget under discussion in the National Assembly is executed, it will act as an additional factor to raise the growth rate."
He also expected inflation to be higher than the previous forecast (1.3%). He said, "With the sharp rise in oil prices and the rapid increase in agricultural and livestock product prices, the consumer price inflation rate has risen from the 0% range to the 1% range, raising concerns about inflation. The annual consumer price inflation rate will be higher than the previous forecast (1.3%)." The Producer Price Index announced by the Bank of Korea on the same day was also recorded at 105.85 (2015=100), up 0.8% from the previous month, marking the fourth consecutive month of increase. Compared to the same month last year, it rose 2.0%, continuing the upward trend for the third month. However, Governor Lee added, "The possibility of sustained inflation is not considered high."
Governor Lee's remarks on the day resemble those of major central bank leaders such as Jerome Powell, Chairman of the U.S. Federal Reserve (Fed). While the pace of economic recovery is faster than expected, they emphasize that the economic situation remains difficult and continue 'money easing.' However, Governor Lee's consideration of an 'orderly normalization of monetary policy' has already begun. He stated, "An important task for the Bank of Korea this year is to prepare in advance on how to orderly normalize the exceptional easing measures implemented so far once growth and inflation conditions improve." Considering the overheating of the economy and inflation, as well as the rapid rise in asset prices such as real estate and stocks, it may become necessary to decide on raising the base interest rate within this year.
"Growth rate will exceed 3.0%... Inflation rate likely to be higher than expected"
Initially, the Bank of Korea's growth forecast for this year (3.0%) was lower than that of other institutions. The government and the International Monetary Fund (IMF) projected Korea's growth rate at 3.2% and 3.1%, respectively. The Organisation for Economic Co-operation and Development (OECD) raised Korea's growth rate by 0.5 percentage points to 3.3% on the 9th (local time). Although the Bank of Korea maintained its growth forecast considering the rapid recovery in exports at the beginning of the year, it took into account the severity of the third wave of COVID-19. However, expectations for economic recovery increased with the expansion of vaccine distribution, and the U.S. also significantly raised its growth forecast from 4.2% to 6.5%, which contributed to the upward revision of the growth rate.
Regarding inflation, Governor Lee said, "In the second quarter, the base effect from last year's sharp decline in international oil prices will likely raise the inflation rate to the high 1% range, and in the second half of the year, it will generally fluctuate around the mid to high 1% range." However, he drew a line regarding inflation concerns, as the inflation rate still remains below the target level (2%). He stated, "At this time, it is not a situation where monetary policy should respond to concerns about expanding inflation risks."
Persistent doubts about early rate hikes... Bank of Korea closely watching U.S. Fed
Governor Lee's remarks on the day can be interpreted as meaning that accommodative monetary policy must continue until the real economy shows significant recovery. However, market doubts remain. Although central banks have pledged to continue easing for now, if the recovery accelerates, the timing of raising the base interest rate could be brought forward. The reason for the 'early rate hike speculation' is also that central banks typically raise rates preemptively before confirming economic recovery. Since monetary policy takes time to affect the real economy, preemptive action is necessary to prevent overheating.
Governor Lee acknowledged these market expectations. He emphasized, "Depending on the direction of various economic indicators to be released in the future, market expectations for Fed monetary policy may be adjusted frequently, which could increase financial market volatility. As monetary authorities, we are vigilant and closely monitoring the situation."
At last week's FOMC meeting, the Fed stated its intention to keep policy rates unchanged until employment and inflation reach their targets, including ▲a level consistent with full employment and ▲inflation reaching and exceeding 2% for a considerable period. However, among market participants, expectations are emerging that the timing of tapering asset purchases or raising interest rates could be somewhat accelerated due to increased upside risks to growth and inflation.
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