The Bank of Korea showed you can hike rates while virus cases are elevated without chancing an apocalyptic meltdown across markets.
Thursday’s quarter-point hike made South Korea the first major Asian economy to raise rates in the pandemic era.
Contrary to the comically overwrought coverage on Bloomberg TV Wednesday evening in the US (when the decision came down), this isn’t the kind of story that gets the adrenaline pumping and it certainly won’t land above the fold in any western newspapers. But it deserves a dedicated article here because it is a milestone — sort of.
Governor Lee emphasized risks to financial stability. “We’ve decided to put the focus on reducing financial imbalances,” he said Thursday, explaining the move, which was seen as a coin toss headed in. “We’re embarking on a process of normalizing policy in line with the economic recovery,” Lee added.
Lee gently noted that policy is still accommodative. The bank’s updated outlook showed inflation at 2.1%, above the previous forecast (1.8%). At 4%, the growth projection was unchanged. It assumes virus cases begin to abate starting in October. Consumption, Lee said, will improve thanks to vaccines and fiscal policy.
The BOK reiterated that the virus’s resurgence shouldn’t hurt the “fundamental recovery.” The country reported 1,882 new cases Thursday. That was right around the seven-day average.
Last week, daily infections hit a new record high. Wednesday marked the 50th consecutive day the country logged 1,000 new cases or more. “The virus has shown no signs of slowing despite officials enforcing strong social distancing restrictions short of a lockdown in Seoul and other large population centers where private social gatherings are banned after 6 PM,” the AP wrote, summing up the situation.
Apparently, though, concerns around “financial imbalances” are paramount. Household debt and home prices are rising fairly rapidly (figure below), while inflation is running the hottest since 2012.
Lee went on to contend that the economic impact of the Delta variant isn’t as severe as last year’s waves because consumers are “adjusting” their behavior to what we’re calling the “new normal,” which is apparently defined by mass pestilence.
“We do not expect this to be a one and done decision, with at least another couple of hikes likely in the months ahead, potentially with another 25bps move at the November 25 meeting,” TD said Thursday.
“Justification for a rate hike came from high frequency data, which are holding up well while inflation is still uncomfortably high [and] the housing market is heating up,” the bank’s Mitul Kotecha added, before noting that in their view, the BOK’s hike won’t “set a precedent for other Asian central banks” which are “set to maintain an accommodative bias even if further easing in the region is unlikely.”
The lone dissent, from Joo Sangyong, probably reduces the odds of another hike in October, but it’s worth noting that for all the tilting at “financial risk” windmills, the BOK is trying to stay ahead of the Fed. Thursday’s move was preemptive in that regard. Even if Jerome Powell telegraphs a taper unveil at Jackson Hole and the September meeting were to cement a timeline (which would be considered a hawkish outcome), South Korea has self-administered the first dose of a monetary vaccine, which should provide some immunity against whatever fallout is coming for emerging markets from the Fed’s efforts to gradually remove accommodation.
