Bank of Korea Deputy Governor Cautions on Rate Hike Side Effects, Urges Flexible Policy

Kwon Min-soo, the newly appointed Deputy Governor of the Bank of Korea, stated on August 21st that while interest rate hikes can be effective, they also carry potential side effects. He emphasized the need for policy decisions to be balanced, cautious, and flexible when necessary.

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While raising interest rates has policy effects, there can also be side effects. It seems to be a time to make policy decisions in a balanced, cautious, and, if necessary, flexible manner.

Following his inauguration ceremony, Kwon told reporters that policy decisions must consider economic growth, inflation, and financial stability. He noted that while the semiconductor industry's strength has improved growth prospects, inflation remains above target, and risks associated with household debt and housing prices persist. Geopolitical and trade risks further complicate the outlook, necessitating careful and adaptable policy judgment.

Kwon reiterated his commitment to fulfilling the Bank of Korea's core roles of price stability and financial stability. He also pledged to enhance macroeconomic analysis capabilities, improve monetary policy tools, and refine market communication strategies. Regarding the won-dollar exchange rate, which has fallen below 1300 won, Kwon suggested that while short-term market fluctuations have played a role, the fundamental trend is downward. However, he cautioned that external factors like stock market volatility and the Middle East conflict mean exchange rates cannot be entirely disregarded in monetary policy decisions.

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We must consider growth and inflation, as well as financial stability.

He also addressed the market volatility, attributing it partly to the relatively small size of South Korea's financial markets compared to its economic scale and major corporations like Samsung Electronics and SK Hynix. Kwon identified expanding the market, starting with the internationalization of the Korean won, as a key task. He expressed optimism about South Korea's potential inclusion in the MSCI developed market index, noting that significant hurdles have been cleared and efforts are underway for potential inclusion in late 2024 or early 2025. As a standing member of the Monetary Policy Committee, Kwon will participate in his first policy-setting meeting on August 27th.

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The fundamental trend is downward, but we cannot completely ignore the exchange rate when deciding on interest rates, given stock market uncertainties and the situation in the Middle East.