Interest Rate Hike Expected in August

The Bank of Korea froze its benchmark interest rate Wednesday for the 15th straight month, but speculation is rising that it will raise the rate around August.

Gov. Kim Choong-soo told a news conference after the rate was frozen at two percent that the bank’s Monetary Policy Committee will decide on a hike after considering the domestic and overseas economic situations and other factors.

His comment is being interpreted as reflecting the bank’s judgment that conditions are ripe for a rate increase despite jitters over the global economy following the financial crisis in southern Europe.

The committee deleted the expression “for the time being” from its statement, which had said over the last 13 months that it would “maintain the trend of monetary easing for the time being.” The move suggests a rate hike once economic jitters caused by the southern European financial crisis are resolved.

The central bank shifted its position because the private sector’s ability to stand on its own – which the bank said is a precondition for a rate hike -- is showing clear signs of recovery.

Kim also said the prolonged trend of low interest rates is slowing corporate restructuring. “Restructuring efforts to strengthen economic fundamentals are necessary for the Korean economy, which heavily depends on overseas conditions, to continue stable economic growth,” he said. “We’ll also consider factors affecting national competitiveness or restructuring.”

The central bank, however, seems likely to keep the key rate intact until late July, when it announces economic growth for the second quarter. Strategy and Finance Minister Yoon Jeung-hyun said May 3 that the government policy of monetary easing will remain until growth in the second quarter is known.

weappon@donga.com