South Korean policymakers should consider the impact on the economy and financial stability of their efforts to rein in inflation, central bank Governor Rhee Chang-yong said, signaling a recalibration as a tightening cycle winds down.
(Bloomberg) — South Korean policymakers should consider the impact on the economy and financial stability of their efforts to rein in inflation, central bank Governor Rhee Chang-yong said, signaling a recalibration as a tightening cycle winds down.
“If the emphasis was on inflation last year, it appears this year will be one where, while the emphasis remains on inflation, the trade-off with the economy and financial stability should be closely considered,” Rhee said Wednesday.
The Bank of Korea last week executed what markets interpreted as the final interest-rate increase of its 18-month tightening cycle. Government bond yields slid and the won weakened in response, even as Rhee sought to keep his policy options open.
Rhee said that reaction was anticipated and market yields are primarily declining because risk premiums spurred by the default last year of a Legoland Korea developer are easing.
The governor’s comments Wednesday are his clearest indication yet that concerns about the economy are coming to the fore and that the BOK would increasingly factor these into its rate decisions this year.
Slowing growth — the governor flagged a potential contraction last quarter — is a growing concern for the board as the impact of its unprecedented tightening feeds through the economy. The BOK last year delivered two half-point hikes, its largest ever increases, as it sought to narrow a rate differential with the Federal Reserve.
Of the seven BOK board members, three expect that tightening has now ended at the current 3.5% rate, while three others didn’t want to close the door on a further increase. The governor hasn’t disclosed his position.
The central bank said last week that it would take account of the pace of inflation and downside risks to the economy and financial stability in deciding whether to tighten policy further.
A property-market downturn, weakening consumer sentiment and declining exports due to waning semiconductor demand are other factors darkening the outlook at the beginning of the year.
A potential rekindling of oil prices in response to rising global political tensions is particularly concerning because it could prompt the Fed to hike rates further, Rhee said. Local real-estate market woes and weakening exports are also significant worries, he said.
Rhee said earlier this month that he would work closely with the government to achieve a soft-landing for the economy. Still, he kept the focus of his New Year messages on fighting inflation, saying it mattered most to Koreans’ livelihoods.
Inflation remained elevated at 5% in December, more than twice the central bank’s target. But there are signs it will ease amid cooling energy prices, and the BOK forecasts it will slow to 3.6% this year.
Analysts surveyed by Bloomberg predict the economy contracted in the fourth quarter, having downgraded their expectations from a previous poll.
(Updates with further comments from Governor Rhee.)
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