Bank of Korea Deputy Governor: 'Need to Continue Interest Rate Hikes'

South Korea's central bank deputy governor, Yoo Sang-dae, emphasized the necessity of maintaining a policy of interest rate hikes. Speaking at a press conference on Tuesday, Yoo cited concerns over sustained inflationary pressures, driven by unprecedented income growth, and escalating risks to financial stability.

"There is a need to continue the interest rate hike trend," Yoo stated, noting that while growth remains robust due to significant income increases, underlying inflation is persistent, and financial risks are growing. His remarks come as the Bank of Korea's Monetary Policy Committee is scheduled to meet on July 27th to discuss the base interest rate. Yoo himself is nearing the end of his three-year term as deputy governor, with his successor yet to be named.

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There is a need to continue the interest rate hike trend.

The Bank of Korea last raised its base rate in January, moving it from 2.50% to 2.75%, signaling a shift from its previous accommodative monetary policy. Financial markets anticipate at least one or two more rate increases by the end of the year. Regarding the possibility of a rate hike in August, Yoo indicated that the committee would review key economic indicators, including second-quarter GDP figures and July inflation data, suggesting that further increases are not off the table.

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The rate hike in July was prompted by stronger-than-expected growth and inflation exceeding the target level, trends confirmed by recent economic data.

Yoo explained that the rate hike in July was prompted by stronger-than-expected growth and inflation exceeding the target level, trends confirmed by recent economic data. He differentiated the current situation from past rate hike cycles, highlighting that the current economic expansion is accompanied by improved terms of trade, leading to unprecedented nominal GDP growth and current account surpluses. This surge in income, he argued, fuels domestic demand, exacerbates inflation, and necessitates higher interest rates. He also projected that cost-push pressures from the Middle East conflict, combined with demand-side pressures from economic recovery, would sustain high inflation, potentially for an extended period, even if the consumer price increase is less severe than during the Russia-Ukraine war.

Addressing financial stability, Yoo pointed to rising housing prices in Seoul and surrounding areas, fueled by expectations of further appreciation and instability in the rental market. This has led to increased household debt. He stressed the need for consistent policy implementation, including macroprudential measures, real estate policies, and efforts to decentralize economic activity away from the Seoul metropolitan area. On the foreign exchange front, Yoo noted that while the won-dollar exchange rate has fallen, it remains high. He predicted a gradual stabilization, with the rate moving downwards over time, supported by fundamental factors like current account and trade surpluses. He attributed the sharp depreciation of the won late last year and early this year to temporary supply-demand factors rather than fundamental issues, suggesting these influences have largely dissipated.

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While the won-dollar exchange rate has fallen, it remains high. Considering fundamental factors like current account and trade surpluses, it will gradually stabilize, though the speed is uncertain.