SEOUL- The South Korean central bank chief’s comment that he could consider big-step interest rate raises in coming months shook the local bond market on Monday, as Asia’s fourth-largest economy also braced for fast slowing in growth.
Yields on government bonds rose as traders rushed to cut their bets on a slower pace of policy tightening ahead, while stock prices reversed early gains to fall modestly on weakening economic growth prospects.
Bank of Korea Governor Rhee Chang-yong, who took office last week and is due to chair his first policy meeting on May 26, said he could consider bigger interest rate increases, depending on data that will become available around July and August.
“(I may be able to say) after watching the May policy meeting and more data by around July and August,” Rhee said when asked by reporters whether the bank was considering a 50-basis-point interest rate rise at its May 26 meeting.
The Bank of Korea usually changes its benchmark rate in 25-basis point increments, but the US Federal Reserve’s big-step approach means South Korea’s interest rate premium over the United States will disappear and could soon become a discount.
Another senior Bank of Korea official later played down Rhee’s remark, saying it merely emphasized the principles of making policy decisions.
Still, analysts said Rhee’s comment made it clear that inflation still took the priority in the central bank’s policy.
“We are in a situation when hawkish comments are needed to contain inflation and in turn help stabilize the bond market,” said Moon Hong-cheol, economist at DB Financial Investment, adding Rhee’s comment may have been a well-calculated one.
The yield on the country’s benchmark 10-year treasury bonds, which had fallen nearly 30 basis points over the past week, shot up as much as 12.4 basis points to 3.340 percent in early trade. It later cut gains to trade 3.0 basis points higher.
Meanwhile, the country’s most influential government research agency said in a report that policymakers needed to focus more on the domestic situation and may not have to raise local interest rates as much and fast as the United States does.
