Incoming BOK Governor Sees Korea Rate Increase Looming: Economy

Incoming Bank of Korea Governor Lee Ju Yeol
Lee Ju Yeol, incoming governor of the Bank of Korea. Photographer: SeongJoon Cho/Bloomberg

Incoming Bank of Korea Governor Lee Ju Yeol said South Korean households need to prepare for higher interest rates, bolstering analysts’ forecasts for an increase as inflation picks up.

“Even when the government asks the central bank to play a role in boosting the economy, the Bank of Korea should decide after considering price stability and all other aspects of the economy, such as financial stability, growth and employment,” Lee wrote in a document in response to questions by opposition Democratic Party lawmaker Kim Hyun Mee.

With the BOK forecasting the fastest growth since 2010 and inflation rising into its target range this year, economists’ median forecast is for a quarter-point rate increase by the first quarter of 2015. That would contrast with the State Bank of Vietnam, which today signaled a cut to support a struggling economy, and follow New Zealand’s decision last week to tighten policy.

“His comments are realistic and echo our view that at this level policy rates are too low,” said Wai Ho Leong, an economist at Barclays Plc in Singapore, forecasting a rate increase late in the third quarter or early in the fourth. “Whether it is a quarter later or a quarter sooner, it is like a visit to the dentist -- an inevitability.”

South Korea’s won strengthened 0.4 percent to 1,068.12 per dollar as of 2:54 p.m. in Seoul, according to data compiled by Bloomberg. The yield on South Korea’s three-year government bonds rose two basis points to 2.85 percent, Korea Exchange prices show.

Faster Inflation

President Park Geun Hye nominated Lee to take over after Governor Kim Choong Soo’s term ends March 31. Lee, 61, a former senior deputy governor with 35 years experience at the BOK, will face questions from ruling and opposition lawmakers on March 19, the first such grilling of a governor nominee in the BOK’s history. The lawmakers don’t have the power to block the appointment.

Goldman Sachs Group Inc. today maintained its call that the BOK will cut interest rates in the second quarter, according to economist Kwon Goohoon in Seoul, who said he hadn’t seen Lee’s comments.

The BOK left its seven-day repurchase rate unchanged at 2.5 percent last week for a tenth straight month, in line with forecasts of all 18 economists surveyed by Bloomberg News.

The State Bank of Vietnam will cut its refinance rate to 6.5 percent from 7 percent from March 18 to bolster a struggling economy, Le Duc Tho, chief administrator at the country’s central bank, said by phone today. The Reserve Bank of New Zealand last week raised its official cash rate by a quarter percentage point to 2.75 percent.

Household Debt

Lee urged the government to craft a long-term plan to help households cope with their debt, which reached a record 1,021.3 trillion won ($955 billion) at the end of December.

“Policy makers should help households prepare for a possible increase in interest rates, while reducing the debt burden by guiding them to shift more toward fixed rates and amortizing mortgages,” Lee said.

“The ultimate goal of price stability that the BOK is trying to achieve is to support a sound development of the national economy,” Lee wrote in the document to lawmaker Kim, who is one of 26 members of the committee that will question Lee this week. Kim e-mailed the document to reporters today.

While higher rates would hurt low-income earners, most of the debt is owed by those with high incomes, with the average household able to cope with a certain degree of rate rises, Lee said.

Exchange Rates

The BOK will in principle let the market set foreign exchange rates, according to Lee’s written responses to lawmakers’ question, which were obtained by Bloomberg News. The central bank will act against temporary, excessive, one-direction bets on the won, he wrote.

In case of large-scale capital flight, the BOK will use an appropriate mix of macro-economic policy tools including the currency, foreign exchange reserves, and interest rates to help stabilize financial markets, he wrote.

Lee, who’s a professor at Yonsei University in Seoul and has a master’s degree from Pennsylvania State University, faces pressure to avoid tightening too quickly.

Hyun Jung Taik, vice chairman of President Park’s National Economic Advisory Council, last month cautioned in an interview against lifting rates now. Park is trying to increase the growth potential of Asia’s fourth-biggest economy to 4 percent, lift employment and achieve per-capita income of nearly $40,000 before her term ends in February 2018.

South Korea’s economy will grow 3.8 percent this year and 4 percent next year, the BOK forecast in January. Inflation will accelerate to 2.8 percent in the second half of 2014, back to the central bank’s target range of 2.5 percent to 3.5 percent after hovering at around 1 percent for more than a year.