MNI: BOK Rate Hike Timing Views Split Amid Covid-19-Analysts

A recovery in private consumption could see the Bank of Korea hike its key policy rate as early as October from a historical low of 0.5%, or possibly wait longer for assurance that economic gains are sustainable, according to analysts at two leading Japanese think tanks.

"The slowdown in gross domestic product for the second quarter seems to be within forecast. Exports fell 2.0% q/q (in the second quarter) caused by the shortage of semiconductors. But exports are expected to remain solid on the back of firm overseas demand," Hidehiko Mukoyama, the senior analyst in charge of Korean economy and industry at Japan Research, told MNI.

The BOK kept monetary policy unchanged at its last meeting (see: MNI STATE OF PLAY: BOK Holds Rates, Weighs Pandemic, Inflation - July 15). The next meeting is on Aug. 26.

Mukoyama said private consumption will be weighed down by the spread of the coronavirus in the July-September quarter.

"However, the consumption will not deteriorate sharply on the back of government subsidies, he said, adding that pent-up demand is expected to emerge as lockdown conditions ease.

NOT EASY TO RAISE RATES

But Kim Myoungjung, Social Improvement and Life Design Research Department Research fellow at NLI Research Institute, said that it would not be easy for the BOK to raise the policy rate under the existing coronavirus and economic conditions.

"The government subsidies will have some positive impact on consumption, but they will not fully move toward spending as the labor market situation hasn't been improved and the unemployment rate among young person stays at high level," Kim told MNI.

He said it would take time, without elaborating on a possible timeframe, for the BOK to normalize the policy interest rate.

BOK DISCUSSIONS

BOK Chairman Lee Juyeol has flagged future rate hikes, saying in July that the bank should normalize its monetary policy in an appropriate timing if the economy continues recovering.

"In this process the Board will judge whether it is appropriate to adjust the degree of accommodation while thoroughly assessing developments related to COVID-19, changes in the pace of growth and inflation, and the risk of a buildup of financial imbalances," Lee said.

One MPC member in the last meeting had called for a 25bps hike, according to Lee (see: MNI BOK REVIEW: - July 2021: Hawkish Dissent Surprises - July 16).

Historically, policy changes have tended to follow in the months after a dissenting vote.