South Korea to launch monetary tightening in Asia
SEOUL (Reuters) – South Korea is set to be the first Asian economy to raise interest rates from pandemic-era lows as its outgoing central bank governor steps up efforts to root out any fledgling real estate bubble or any household debt stress.
Bank of Korea Lee Ju-yeol surprised financial markets last week when policy rates were kept at record highs, but he signaled that they could rise as early as August, during the next review of politics.
Even though Asia’s fourth-largest economy has quickly recovered and inflation exceeds target, it is battling record cases of COVID-19 as the most infectious Delta variant spreads, triggering strict measures and a semi-locking in the Seoul area.
“This is one of those rare times when house price control has become more important, both on the political and economic fronts,” said Yoon Yeo-sam, analyst at Meritz Securities.
“Nothing the government has done in recent years has stopped house prices soaring, and time is running out for both Lee and the government.”
Lee’s term as governor ends in March 2022, just weeks before President Moon Jae-in resigns. During his eight years at the helm, the hawkish-leaning Lee has struggled to contain debt levels in a risk-prone country.
The Bank of Korea (BOK) cut its key rate by 75 basis points last year to a record high 0.5% to support the economy.
These low interest rates have encouraged households to borrow heavily. Household debt stood at 1,765 trillion won (US $ 1,550 billion) in March, including 931 trillion won in mortgages.
Cheap money has further fueled speculation in the real estate, stock and cryptocurrency markets. House prices have skyrocketed despite a series of measures such as taxes and restrictions on loans, prompting the BOK to warn in June that the financial vulnerability of local asset and credit markets was at its highest. high level since the 2008 global financial crisis.
Analysts now believe interest rates are too low for an economy expected to grow 4% this year, its fastest since 2010. Inflation is also well above the central bank’s 2% target.
“Lee clearly has his retirement schedule in mind. He doesn’t have much time left to really do what he wants, which is to reduce the growth in debt and house prices, this is the legacy he wants to return home ” said Kong Dong-rak, an economist at Daishin Securities.
“The longer he waits, the more difficult it will be for him to move forward with the tightening,” he said, citing the distraction of the March presidential election as the reason.
If the BOK raises rates at its policy meeting in late August, it will even overtake the Reserve Bank of New Zealand, the most hawkish central bank in the developed world.
Economists are divided, however, on how far Lee will go as the central bank balances financial risks against economic growth.
Yoon of Meritz Securities said Lee’s recent remarks sounded more hawkish than ever, and “at least a hike appears to be warranted, but further tightening could be difficult depending on the strength of the recovery after this outbreak.”
The coronavirus variant is bad news for an economy in which only about 30% of the country’s population has been vaccinated, and comes at a time when the reopening of Western economies could reduce demand for Korea’s electronics exports.
Yet household debt has swelled to around 175% of disposable income. The median apartment price in Seoul rose to 1.14 billion won ($ 1 million) in June, up about 70% since Moon took office in 2017, according to data from KB Bank.
Chart: house prices in South Korea –
“The BOK’s reaction function has undergone a drastic change, and it now appears to prioritize monitoring housing markets,” Nomura analysts said in a note, as they forecast two rate hikes this year. year and another in 2022.
“Take off in August,” said HSBC, advancing its call for a fourth quarter rate hike, saying the BOK was prioritizing financial stability.
Morgan Stanley analysts expect the first rate hike in October and say “our forecast for key rates should be seen as gradual political normalization rather than political tightening.”
“The BOK is ready to start normalizing its policy and one or two hikes are not considered a tightening, in its opinion,” Kim Jin-wook, economist at Citigroup said in a note, while advancing his forecast of August rate hike from October. .
Editing by Vidya Ranganathan and Jacqueline Wong