Raised Growth Rate Forecast by 1.0%P Compared to Three Months Ago
Inflation Rate Forecast Also Increased to 1.8%
[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] The Bank of Korea on the 27th significantly revised upward its economic growth forecast for this year to 4.0%. This is an increase of 1.0 percentage point from the forecast three months ago (3.0%). The inflation rate forecast for this year was also raised to 1.8%. Although the Bank of Korea kept the base interest rate steady at 0.50% per annum on the day, the raised growth and inflation forecasts have led to assessments that the possibility of a rate hike within the year has increased.
Lee Ju-yeol, Governor of the Bank of Korea, stated at a press conference held immediately after the Monetary Policy Committee meeting, "Exports have continued to perform well, facility investment has maintained a steady recovery trend, and private consumption is gradually recovering from its sluggishness," adding, "The employment situation has also shown improvement, with an increase in the number of employed persons."
He continued, "Going forward, the domestic economy is expected to strengthen its recovery, supported by favorable exports and investment, as well as improvements in private consumption." This reflects a much more positive economic outlook compared to last month, when he mentioned that "uncertainty regarding the speed of recovery remains high." The base effect also played a role compared to last year’s -1.0% growth rate caused by the COVID-19 shock. The Bank of Korea also raised its growth forecast for next year from 2.5% to 3.0%.
The growth rate announced by the Bank of Korea for this year is higher than the market’s expected forecast (in the high 3% range). It is the first time since 2000 that the Bank of Korea has raised its growth forecast by as much as 1.0 percentage point within three months.
The inflation rate forecast (1.8%) was also revised upward by 0.5 percentage points compared to the previous forecast, and the Bank of Korea expects the core inflation rate to remain in the low 1% range. The inflation forecast for next year remains at 1.4%.
As the inflation rate approaches the Bank of Korea’s target of 2.0%, the possibility of a rate hike within the year has increased. Currently, a rate hike in November, when herd immunity is expected to be achieved through vaccination, is considered highly likely. Governor Lee also expressed concerns about household debt. He emphasized, "While maintaining an accommodative monetary policy stance, we will carefully monitor the economic conditions of major countries and pay closer attention to the accumulation of financial imbalances such as capital concentration in asset markets and the increase in household debt during this process."
Experts are focusing on the possibility that the Bank of Korea may raise the base interest rate ahead of the United States. Jinil Kim, Professor of Economics at Korea University, said, "There is likely an intention to raise the rate once before Governor Lee Ju-yeol’s term ends at the end of March next year," adding, "A rate hike could happen at the end of this year or early next year."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
