MNI STATE OF PLAY: BOK To Hold Steady As Hike Pressures Grow

The Bank of Korea is moving closer to mulling a rate hike later in the third quarter of the year as houses prices continue to push higher and financial imbalances grow.

Policymakers are expected to keep rates stable at the July 15 meeting, but consideration of a hike could come as early as the August meeting, after second quarter GDP data is published in late July.

Before moving to raise rates, officials need to see how the economy evolved in the April to June period and how Covid-19 is spreading through the country as mutations grow -- the government has just reimposed the highest level of restrictions as infections rise.

Although a move is unlikely in July, the statement and comments from the BOK Governor Lee Juyeol, and chairman of the monetary policy board, could give an indication of how many board members could be edging towards a hike.

FLAG

Lee has already flagged the possibility of future rate hikes, saying that the bank should normalise its monetary policy in a timely manner if the economy continues recovering, adding that the bank stands ready to scale down its easy policy amid accelerating inflation rate and growing financial imbalances.

BOK officials see higher housing prices and rising household debts linked closely to the prolonged easy policy although they are as yet uncertain when to start tightening, close watchers of the central bank tell MNI.

One observer noted that the government would like to keep the economy bubbling ahead of the election next year but would not be averse to the BOK helping peg back high house prices, which would be an electoral boost.

OUTLOOK

Certainly the economic outlook at least gives policymakers pause for thought. GDP rose 1.7% y/y in Q1, regaining its pre-pandemic level and the government, pointing to fiscal stimulus measures, has just raised its growth forecast for this year to 4.2% from 3.2%.

Higher growth is feeding through to higher price indicators above the BOK's target levels. The consumer price index rose 2.4% y/y in June, coming fast behind a 2.6% y/y rise in May that was the highest in nine years.