A South Korean central banker raised the possibility of higher interest rates as far back as August, adding to evidence that Asia's fourth-largest economy may be the first G20 country to tighten monetary policy. Minutes of a Bank of Korea August 11 meeting show a member of the monetary policy committee said policymakers should consider a shift away from a loose stance to curb asset price growth.
If the central bank raises rates, it would be the first move to tighten policy since the start of the financial crisis. "Once we confirm the establishment of an economic recovery, we will be able to consider shifting the currently loose monetary policy stance," the minutes, released on Tuesday, quoted the unidentified member as saying. "In particular, I think we need to take an especially careful attitude to prevent the reckless growth in asset prices from leading to consumer price growth," the policymaker said.
Bank of Korea Governor Lee Seong-tae also expressed his concern about a property boom during a news conference on the same day, prompting investors and analysts to begin pricing in an interest rate increase later this year. Lee's hawkish comments again early this month have raised the possibility of the Bank of Korea becoming the first G20 central bank to begin raising rates since the start of the crisis.
But all the six board members voted to keep the benchmark 7-day repurchase agreement rate unchanged at a record low of 2.0 percent for a sixth month, the minutes showed. The Bank of Korea does not name members in its meeting minutes unless the member insists.
Data released on Tuesday by the Ministry of Knowledge Economy and the top business lobby showed confidence among companies at its strongest in two years. Current account data, released early by the central bank, also added to optimism that Asia's fourth-largest economy was recovering ahead of others thanks to stimulus spending and the won's depreciation against other currencies.
The current account surplus more than halved in August from July as imports grew while exports shrank slightly. The import growth reflected a recovery in demand from consumers and companies. "Confidence that the economy is now recovering quite fast must have made the Bank of Korea take a hawkish stance on the booming property market," said Kim Jae-eun, an economist at Hyundai Securities.
"The board member's comments came in line with what Governor Lee had said and, therefore, I maintain my forecast that the Bank of Korea will raise interest rates once this year," she said. But the government of President Lee Myung-bak has been publicly at odds with the central bank, with officials repeatedly warning that a hasty tightening could hamper a timid recovery.
Most analysts forecast a rate rise early next year, but money markets are pricing in a growing risk of a rise during the year, with the 1- and 3-year interest rate swap spread narrowing by more than 10 basis points over the past two months. The Bank of Korea had slashed the benchmark rate by 3.25 percentage points between October and February to protect the economy from the crisis.
It next reviews the rate on October 9. Governor Lee's warnings that it was ready to raise interest rates because of a property boom came amid heating debate abroad over whether central banks should target asset prices rather than the more traditional consumer price index.
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