South Korea's central bank could discuss raising the key interest rate in a pre-emptive manner if demand-pull inflationary pressure rises, its new chief said Thursday.
Bank of Korea (BOK) Gov. Lee Ju-yeol presided over his first rate-setting meeting, in which the monetary policy committee unanimously held the benchmark seven-day repo rate, called the base rate, at 2.5 percent for the 11th straight month.
Lee, a former senior deputy governor at the BOK, replaced his predecessor Kim Choong-soo on April 1, vowing to operate the monetary policy in a consistent and predictable manner.
"If output gap narrows and demand-pull inflationary pressure mounts, the bank will be able to discuss moving the key interest rate pre-emptively," the governor told a press conference.
He said it would not be desirable for the BOK to respond to low inflation with monetary policy when consumer prices remain subdued due to the supply shock such as weak prices of agricultural products.
"Economic growth and inflation will be critical macroeconomic gauges in deciding the monetary policy," Lee said.
His comments came as the BOK revised up its 2014 growth outlook to 4 percent from 3.8 percent while cutting its inflation projection to 2.1 percent from 2.3 percent.
"The pace of economic recovery is seen as being in line with the economy's long-term growth potential," Lee said. "But the output gap is still in negative territory."
Negative output gap means that actual economic growth underperforms its growth potential. The BOK said in a statement that the output gap will gradually narrow, although it will stay in the negative terrain for the time being.
"Lee's stance seems to tilt more toward the monetary tightening down the road," said Yoon Yeo-sam, a fixed-income analyst at KDB Daewoo Securities Co. "I think that one or two rate hikes may be possible through the first half of next year."
Hong Jung-hye, a fixed-income analyst at Shinyoung Securities Co., said that Lee's remarks dampened any expectations for a rate cut in the market, saying that it may take time for the BOK to actually begin to hike the borrowing costs.
The Korean economy is widely viewed as on the recovery track, aided by robust exports and improving domestic demand.
Despite signs of economic recovery, Korea's inflationary pressure still remained tame. The country's consumer prices grew
1.3 percent in March from a year earlier, quickening from a 1 percent on-year gain in February but running below the BOK's
2.5-3.5 percent inflation target band for the 22nd straight month in March.
"Consumer prices will go up to the upper 2 percent range in the second half," Lee noted.
The BOK said that risks to the growth are seen as neutral.
Slowdown in emerging markets including China and the yen's weakness will serve as downside risks but that recovery in the U.S. and Europe would counteract them.
Korea's current account surplus and its economic growth have been putting upward pressure on the local currency.
The won shot up to 1,031.40 per the dollar, a near six-year high, at one point on Thursday. But it pared down its earlier gain to end at 1,040.20 versus the greenback, up 1.2 won from Wednesday's close after the foreign exchange authorities made verbal intervention.
"The BOK is closely monitoring an increase in the currency volatility. If one-sided movement in the currency market intensifies, the BOK will make efforts to stabilize the market," Lee said. (Yonhap)