Key rate still accommodative: Bank of Korea

Key rate still accommodative: Bank of Korea

Bank of Korea Deputy Governor Park Jong-seok speaks during an online press conference on its monetary policy report, at its headquarters in Seoul, Thursday. Courtesy of the Bank of Korea

Omicron variant may intensify inflationary pressure

By Lee Min-hyung

The Bank of Korea (BOK) has renewed its signal for another key rate hike, as the economy is being exposed to possibly longer-than-expected inflationary pressure.

“Under our current outlook, the benchmark rate is still at an accommodative level, as the economy is expected to continue its robust recovery and inflation expectations will be long-lasting,” BOK Deputy Governor Park Jong-seok told reporters during a press conference after releasing the central bank’s latest monetary policy report.

His remarks left open the possibility for the central bank to increase the key rate once more sometime in January or February, after having done so twice in August and November, pulling it up to 1 percent.

“But it is hard for us to consider increasing the benchmark rate to a contractionary level,” he said.

Earlier thoughts were that the central bank would carry out two rate hikes pushing it to 1.5 percent. BOK Governor Lee Ju-yeol recently reaffirmed his hawkish rhetoric toward the key lending rate over the necessity of normalizing monetary policy amid a widening financial imbalance and surging household debt.

But the latest comment from Deputy Governor Park increases the likelihood for the BOK to raise the key rate to a pre-pandemic level of 1.25 percent and then take a wait-and-see attitude, before preemptively increasing it once more.

The BOK executive did not specify other details on the timeline of any rate hike, only saying that the central bank’s judgment “does not differ a lot from the expectations of the market.” He pledged to communicate with the market if the BOK needs to adjust its economic outlook.

The BOK also said that the outbreak of the Omicron variant of COVID-19 will end up deepening global supply bottlenecks, thereby putting rising inflationary pressure on the local economy.

“Omicron has increased uncertainties regarding the economic outlook, as it will have a diverse range of impacts on consumption, growth and prices,” Park said. But it is difficult for the BOK to calculate exactly how serious a threat the new variant will be for the economy, due to the lack of specific data, he added.

The central bank also noted that the spread of the Omicron variant might result in a demand-side slowdown, which would bring downward pressure on inflation.

“Even if we recognize the uncertainty over the spread of the new variant of the coronavirus, we still need time to collect the relevant data before analyzing which pressure is stronger,” Park said.

Regarding the effect of the recent rate hikes, the BOK said that they helped weaken investor sentiment to pursue excessive profits by taking out loans.

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