SEOUL -- The head of South Korea's central bank on Thursday signaled an interest rate increase is coming within this year, striking a note of caution about side effects from a prolonged loose monetary policy.
The Bank of Korea's seven-member policy board opted the same day to hold the benchmark rate steady at a record-low 0.5%, with one dissenting vote. But Gov. Lee Ju-yeol said keeping interest rates low for too long would worsen financial imbalances and undermine the country's growth base.
"We need to cope with financial imbalance by normalizing monetary policy," Lee told reporters after freezing the rate, adding that most members agreed that resolving the imbalance issue should be the focus.
Lee was speaking as South Korea confronts its fourth and worst coronavirus wave, with daily new cases hitting a record 1,615 on Wednesday. Officials have warned virus variants are spreading quickly among the young and not-yet-vaccinated generation.
But Lee sounded confident that the outbreak would not derail the economy's growth momentum. "We believe that it will not undermine the economic recovery seriously, thanks to vaccine inoculations and the extra-budget effect," he said.
The chief central banker said the South Korean economy is expected to grow around 4% this year, as exports and corporate investment continue to rise. Exports jumped 39.7% on the year to $54.8 billion in June, marking the third-highest figure ever, thanks to strong demand for semiconductors and cars.
Analysts say the BOK is likely to take action soon, possibly even next month, having sent a clear message that soaring home prices have triggered financial stability concerns. Housing prices have surged over the last year, as the government's policy to control the rent market caused panic buying of homes.
"Unless there is clear evidence that the economy is likely to experience a significant setback, or return to recession, due to the current health crisis, we believe the BOK will likely continue indicating that rate hikes are around the corner," said Park Jeong-woo, an economist at Nomura.
Citibank predicted the BOK will hike its rates twice -- once in August and again in January -- before Gov. Lee ends his term at the end of March.
"Assuming two to three weeks of strict measures in the greater Seoul area, we bring forward our first hike call to August from October, given [the] July [monetary policy board’s] clear signal for an imminent exit strategy," said Citibank's Kim Jin-wook.
The economist said that there was a 60% probability for the first rate increase coming in August, and a 40% chance in October.
Kim had said earlier that the country's 2021 gross domestic product growth should stay sufficiently above 4% despite the downside risks from virus restrictions, with an overall recovery of consumption and services likely to continue in the second half of the year.
As of Tuesday, over 30% of the population had received at least one vaccine dose, with 12% fully vaccinated, according to the statistics website Our World in Data.