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BOK governor nominee flags further policy tightening, but at more sedate pace than Fed

CNA – South Korea’s central bank governor nominee Rhee Chang-yong said yesterday the bank will continue to tighten monetary policy, but suggested the pace of hikes will be more sedate than what is expected of the United States (US) Federal Reserve.

In a speech prepared for a parliamentary hearing, Rhee noted that downside risks to growth is increasing, but called for further reduction in the Bank of Korea’s (BOK) accommodative policy settings to curb inflation now at double the bank’s two per cent target.

“The degree of policy accommodation needs to be adjusted at an appropriate pace to stabilise prices without hurting growth momentum, and (the BOK) will also seek to ease household debt growth in the process,” Rhee said in the speech.

In a surprise move, the BOK last week raised its benchmark rate to 1.50 per cent, the highest since August 2019 as it ramped up the fight against rampant inflation, which is threatening its economic recovery.

Rhee said although inflation is likely to strengthen over the next year or two, growth headwinds from the Ukraine crisis, US monetary policy, and COVID-19 resurgence in China will also need to be closely monitored and factored in policy decisions.

The logo of the Bank of Korea on the top of its building in Seoul, South Korea. PHOTO: CNA

The four rate hikes since August last year returned the policy rate to pre-pandemic levels, reinforcing BOK’s position as one of the most hawkish central banks in the region, along with it’s peer in New Zealand.

Analysts currently expect the policy rate to rise to two per cent by the end of this year as most economies are now moving in the same direction to fight surging inflation.

“The US has room to raise the policy interest rate at a faster pace as inflation there is double that of ours and as its growth rate is between three per cent and four per cent, but our growth rate isn’t as strong,” Rhee said at the Parliament when asked to comment on the speedy US rate hikes expected by markets and their impact on local policies.

The yield on the most liquid three-year treasury bond declined 5.8 basis points to 2.927 per cent by late morning, reflecting the more sedate pace of tightening flagged by Rhee.

Rhee, a veteran International Monetary Fund official, is expected to start his four-year term once formally appointed after parliamentary hearing.