Bank of Korea Governor Lee Ju-yeol has signaled his intention to tighten monetary policy, fueling expectations the bank will start raising rates earlier than expected–possibly this year.
Most analysts had previously expected the bank’s policy rate — held at a historically low 0.50% since May 2020 — to increase starting in 2022, though some recently forecast that tightening could start as early as November 2021.
“The current accommodative policy should be normalized in an orderly manner from an appropriate time, if the economy is expected to sustain a solid recovery,” Mr. Lee said in a speech marking the bank’s 71st anniversary Friday.
The timing and pace of rate increases should be decided by the bank’s careful reviews of COVID-19 developments, the strength and sustainability of economic recovery and the cumulative risk of financial imbalances caused by lower borrowing costs, he said.
The central bank chief has recently been seen by Barclays economists as increasingly hawkish, as the country’s economy is recovering faster than expected.
In May, the bank raised its economic growth forecast for South Korea, forecasting it to expand 4.0% for 2021, faster than its February outlook for 3.0% growth.
South Korean exports in May expanded by the most in more than three decades, while inflation accelerated to a nine-year high and topped the central bank’s 2% target for two straight months.
Analysts expect the country’s accelerating COVID-19 vaccination drive to allow the bank to tighten policy earlier than expected.