SEOUL– The Bank of Korea will adjust the accommodative extent of its monetary policy “at an appropriate speed” to rein in inflation to ensure the momentum for economic growth will not be undercut, the nominee for the central bank chief said Tuesday.
During a parliamentary confirmation hearing widely seen as a formality, Rhee Chang-yong added that the central bank under his leadership will work hard to engineer a “soft landing” in household debt through its action on monetary policy.
Rhee was appointed to lead the BOK last month after Lee Ju-yeol left office following eight years at the helm. He had served as a director of the Asia and Pacific department at the Washington-based International Monetary Fund.
The Planning and Finance Committee of the National Assembly adopted the report on the result of the confirmation hearing on the BOK nominee.
“I will try to adjust the accommodative extent of monetary policy at an appropriate pace with caution in mind not to hurt growth momentum and also engineer financial stability, including a soft landing in household debt, through such action,” he said.
Rhee did not mention rate hikes directly but “adjusting” signifies increasing borrowing costs that had been at record lows for about two years until mid-2021 to stimulate the economy that’s been hit hard by the pandemic.
He expressed worries over heightened external uncertainty, citing the protracted war in Ukraine, the U.S. central bank’s aggressive monetary tightening and the possibility of a growth slowdown in China due to the resurgence of omicron infections.
“As a result, upward risks on inflation are expanding, so are downside risks on the economy,” he said.
South Korea’s economy has been on a recovery track from the pandemic driven mostly by robust exports. But inflation pressure has been on the rise, raising worries that it could undercut the growth momentum.
The country’s consumer prices jumped 4.1 percent in March from a year earlier, the fastest gain in more than 10 years.
Rhee expected that consumer prices will keep their upward move “for a significant period of time.”
“The upward inflation trend will likely persist for one or two years,” he told lawmakers.
The BOK raised its policy rate by a quarter percentage point last week to 1.5 percent, the fourth rate increase since last August as it is grappling with rising inflation pressure.
Rhee said that last week’s rate hike came as the BOK placed more emphasis on price stability than on economic growth, adding that he will determine whether to raise borrowing costs further down the road by analyzing both inflation and growth.
The steep rate hikes have spawned concerns that they could hurt economic growth and increase the debt burden on many households and companies that have taken out loans to tide over the pandemic and buy homes.
The nominee for the central bank chief said household debt has increased at a slower pace in recent months, but the amount still remains high, worrying that it could pose “potential risks” to the economy.
Outstanding bank loans to households came to 1,060.1 trillion won (US$865.4 billion) as of the end of February, down 100 billion won from the previous month, according to data from the BOK.
The decline is partly caused by the government’s continued restrictions on lending, rising borrowing costs due to higher interest rates and less demand for home purchases, the BOK earlier explained.
“We should continue to slow the growth (of household debt) through signals on interest rates,” he said.
With regard to the possibility of a reverse in interest rates between South Korea and the United States due to expectations for the latter’s aggressive move to tighten monetary policy, Rhee said that it could take place but dismissed concerns that it would prompt abrupt capital outflows.
He underlined the need for policy fine-tuning in a way that prevents the won’s descent caused by the reversal from driving up inflation pressure by raising import prices.
The nominee also promised to closely cooperate and coordinate with the government “if necessary” to hammer out the central bank’s polices in a “comprehensive” and “consistent” manner.
To expand policy coordination and discussions, Rhee said he intends to meet economic and financial policymakers, including the finance minister, once a week or once a month.
Rhee said the aging population and resulting subdued economic growth are more serious long-term issues confronting the country than inflation, calling for stepped-up efforts to tackle such structural problems.
Source: Yonhap News Agency