Governor of BOK says monetary policy will be normalized

“The current accommodative monetary policy should start to be normalized at an appropriate timing in an orderly fashion,” Bank of Korea (BOK) Governor Lee Ju-yeol said regarding the bank’s focus in the second half of this year during his Friday speech to commemorate the 71st anniversary of the bank’s foundation. Fifteen days after indicating a potential raise of base rate this year at a press conference held on May 27, he sent another strong signal for a rate increase.

“Adjusting the expansive policies adopted to respond to crisis is a necessary process to ensure the stable and sustainable economic growth of South Korea,” said Lee. The BOK intends to normalize its monetary policy according to South Korea’s economic situations in the future after having frozen its benchmark interest rate at 0.5 percent – the lowest figure ever – since May 2020.

“The timing and pace will be determined by closely examining COVID-19 developments, the strength and sustainability of the economic recovery, and the cumulative risk of financial imbalances,” said the governor. “The BOK will sufficiently communicate with markets to minimize the impact in the process.”

　

Governor Lee is sending multiple signals about interest rate increase because not only the economy is recovering faster than expected, but also there are growing concerns about the overheated asset market and soaring household debt. “Funds concentrated on the asset market should be encouraged to flow into more productive sectors while managing economic players’ leverage at a stable level,” Lee said in the speech. “The problem of accumulating household debt has become more serious recently as leveraged investments increase in not only real estate and stocks, but also virtual assets.”

Some market experts believe that the BOK may increase its base rate in September or October, earlier than expected.


Hee-Chang Park ramblas@donga.com