Bank of Korea Governor: Fiscal Spending Can Align with Rate Hikes if Investment-Focused

Bank of Korea Governor Shin Hyun-song signaled a path of gradual interest rate increases, suggesting that further hikes beyond the recent move to 3.0% would likely be modest. Speaking at a press conference following the Monetary Policy Board's decision, Shin indicated that the median forecast points to one more rate increase within the next six months, aligning with a "gentle increase" trajectory.

Addressing concerns about the impact of rising rates on vulnerable borrowers, particularly small and medium-sized enterprises (SMEs), Shin highlighted the central bank's awareness and communication with the government. He noted that support measures for these groups are incorporated into the government's economic plans for the latter half of the year. To provide immediate relief, the Bank of Korea decided to freeze the lending rate for its financial intermediation loans to SMEs at 1.25%.

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Fiscal spending, depending on its purpose and form, can be different. If fiscal spending becomes an investment that boosts future growth, it may not be out of sync with monetary policy and could even create a mutually supportive structure.

Regarding the won-dollar exchange rate, Shin acknowledged that while it has stabilized, it remains at a high level. He expressed confidence that proactive monetary policy responses would continue to manage the exchange rate, potentially preventing further strengthening and helping to offset import price increases, thereby contributing to price stability.

Responding to a question about potential policy divergence between the government's expansionary fiscal policy and the central bank's tightening monetary stance, Shin offered a nuanced perspective. He stated that the relationship between fiscal spending and monetary policy depends heavily on the nature and purpose of the spending. If fiscal expenditures are channeled into investments that enhance future economic growth, they could work in tandem with monetary policy, potentially boosting economic growth without creating policy conflicts.

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We expect a gradual increase. There are four more monetary policy meetings within the next six months. The median forecast is 3.25%, which means about one more hike from the current level.