MNI INTERVIEW: Bank Of Korea To Hike Rates-SMBC Nikko Economist

The Bank of Korea wants to swiftly curb high house prices spurred by low borrowing costs and will move to raise rates for the second straight meeting, said Kota Hirayama, senior economist in charge of emerging economies at SMBC Nikko Securities.

The BOK is expected to hike interest rates to 1.00% from 0.75% on Oct. 12, Hirayama said, adding that the BOK language in the last policy review pointed to rate hike pressures.

"The BOK is worried about continued high house prices, which seems to be a bubble. The rise in house price has been accelerating in the wake of the BOK's easy policy after the coronavirus."

He added that as the economy continues recovering, the government expects the BOK needs to take action to curb house price ahead of the presidential election in March 2022.

However, uncertainty in the near-term over the pace of recovery from the pandemic still means there is scope for the BOK to "take a wait-and-see attitude this month, judging from the spread of coronavirus recently."

NORMALISING RATES

The BOK is in the process of normalising monetary policy and wants to return interest rates as quick as possible to the pre-pandemic level of 1.25% or slightly higher, Hirayama told MNI.

"The inflation rate has remained at high levels, although it has recently fallen. The BOK likely sees the current policy interest rate is considerably low," Hirayama said.

Policy imbalances are also driven by inflation and employment trends.

South Korea's inflation rate fell to 2.5% in September from 2.6% in July and August. Hirayama also said that the number of employed is increasing, while of unemployment is falling.

"Labor market conditions are improving and the foundation for South Korea economy is solid," Hirayama said, which are supportive for the BOK to raise rates. The unemployment rate fell to 2.8% in August from 3.3% in July.