Bank of Korea needs strong signs inflation curbed before pivot

THE Bank of Korea (BOK) needs to see “strong” signs that inflation is under control before discussing any prospect of a pivot away from policy tightening, governor Rhee Chang-yong said on Friday (Nov 25).

The BOK came closer to the end of its tightening cycle when it raised its benchmark interest rate by a quarter-percentage-point to 3.25 per cent on Thursday. At least four of the seven-member board favour the rate peaking at 3.5 per cent or less.

A variety of factors will help determine the course of policy, including Federal Reserve decisions, Covid policies in China and credit-market conditions in Korea, Rhee said in an interview with Bloomberg TV’s Kathleen Hays.

Rhee added that he wouldn’t be surprised if some board members changed their mind over the terminal rate. He declined to provide his own forecast, adding that he respected the board’s view.

It’s “premature” to discuss any rate cuts and the BOK will need strong evidence of inflation slowing to its mid-term target of a 2 per cent range before the board can discuss the potential for easing policy, he said.

The BOK has delivered a total of 2.75 percentage points of rate hikes since August 2021, including two half-point moves. The tightening helped Korea position itself earlier than most nations in the fight against asset bubbles and inflationary pressures.

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However, the central bank’s faster-than-usual tightening in recent months has fuelled credit risks triggered by the default of a local government-backed developer.

Overall, financial markets remain in good condition despite the credit rout associated with the real estate market, which stemmed from a mistake by a local province, Rhee said. He downplayed the chance of needing to provide the kind of liquidity support seen at the start of the pandemic.

“One small mistake can jeopardise the whole economy,” the governor said, describing it as a lesson for the world. BLOOMBERG