Bank of Korea Governor Says Policy Will Remain Open to All Possibilities Regarding August Rate Hike

▲ Bank of Korea Governor Rhee Chang-yong strikes the gavel during a plenary meeting of the Monetary Policy Board at the Bank of Korea in Jung-gu, Seoul, on July 16.

Bank of Korea (BOK) Governor Rhee Chang-yong stated that the central bank would conduct monetary policy while keeping all possibilities open regarding a potential interest rate hike in August.

Speaking at a press conference today (July 16) after the BOK Monetary Policy Board raised the base interest rate from 2.50% to 2.75%, Governor Rhee said, "There is a significant amount of data yet to be released, so we cannot make a definitive commitment in one direction."

He added, "The path of monetary policy is not predetermined," and noted, "We will implement policy by weighing various indicators through several 'live meetings' ahead."

When asked how long the current rate-hike trend would continue, he replied, "We will respond until we are confident that the inflation rate is stably converging toward our target level."

He added, "We will decide how aggressively to respond based on data that becomes available in the future."

Specifically, he noted the need to monitor second-quarter Gross Domestic Product (GDP) statistics, to be released next week, and July inflation data, due next month.

"We will watch the second-quarter national income statistics very carefully," Governor Rhee said. "We will observe whether the unprecedented figures from the first quarter are adjusted downward in the second quarter, or if the strong performance in exports will allow those levels to be maintained."

He continued, "July inflation data will be released next month. While oil prices have dipped slightly, we will closely monitor core inflation and the cost of living."

He also emphasized the need to maintain a monetary tightening stance in terms of financial stability, including exchange rates and household debt.

"Although the exchange rate appears slightly more stable than it was a few weeks ago, it remains at a high level," he said, adding, "This keeps import prices high."

When asked how long inflation is expected to remain above the target level, he replied, "The situation is subject to change depending on our monetary policy response. If we implement monetary policy effectively, it will not remain above the target level for an extended period."

Regarding criticism that the decision to freeze interest rates last May was a missed opportunity, he stated, "We did not have sufficient data at the time, so it was not a missed opportunity."

"At the time, the situation in the Middle East was quite unstable, and there was a judgment that it was acceptable to wait and see," he explained. "I still think so today."

He added, "Various information obtained since May has leaned toward the economy being more robust and the growth trend being stronger than it was back then."

He also mentioned that there is a high possibility of upwardly adjusting the 2.6% growth forecast for this year, which was presented in May.

"Based on current assessments, a 2.6% growth rate is too low," he said. "It will be adjusted upward by a significant margin at the August monetary policy meeting."

He also noted that as the high growth trend continues, the timing for the GDP output gap (the difference between real GDP and potential GDP) to turn positive (+) is expected to move forward.

"During the last press conference, I mentioned that the GDP output gap would turn positive early next year, but looking at the recent situation, there is a possibility that it could happen sooner," he said.

Addressing concerns that interest rate hikes increase the burden on vulnerable borrowers and low-income groups, he said, "Policies that can alleviate the difficulties of vulnerable borrowers, such as debt restructuring, are most necessary. In this regard, fiscal or financial policies that can produce targeted effects are more appropriate than monetary policy."

He added, "We always keep vulnerable borrowers in mind, and it is crucial to have harmonious policies with the government and financial authorities."

Regarding criticism that the BOK's monetary tightening could clash with the government's active fiscal expansion policy, he said, "If fiscal expansion policy leads to higher productivity and raises the potential growth rate, it could be more consistent with monetary policy."

"To state the principle, if fiscal policy leads to investments that increase the overall growth potential of the economy, it does not necessarily have to be at odds with monetary policy," he explained. "The answer may change depending on the form, scale, and execution speed of fiscal spending."

This appears to be a principled explanation that if fiscal policy can raise the potential growth rate, it can align with the ultimate goal of monetary policy, which is economic development.

Regarding recent increased stock market volatility, he said, "We are monitoring the risks to the real economy," but added, "Unlike other debt and liquidity-related indicators, there are not many channels through which stocks connect to financial system risks."

He stated that he does not agree with the criticism that monetary tightening could increase stock market volatility.

"I do not 100% agree with the assessment that interest rates determine stock prices," he said. "While stock market volatility has increased significantly, there are many other contributing factors."

He added that to assess the conditions of the Korean economy, it is more necessary to focus on semiconductor prices rather than the stock prices of semiconductor companies.

"Semiconductor prices themselves lead to terms of trade, and the 13.6% growth in first-quarter GDI was due to rising semiconductor prices rather than export volume," he said. "How long this will last has significant implications for the future of the Korean economy."

He emphasized, "We must also pay attention to this when implementing monetary policy."

Regarding the serious issue of sluggish employment among the youth despite recent improvements in growth, he said, "We have identified that the Middle East conflict has had a significant impact on employment weakness."

"It seems that companies in manufacturing and construction, which are closely related to energy, have acted cautiously," he explained. "I think that as the uncertainty in the Middle East eases, a moderate increase in employment, centered on the service sector, will likely follow."

Regarding the overheating of the housing market, he said, "It is unreasonable to control housing prices through monetary policy alone. We will use macroprudential policies, and monetary policy will play a complementary role to enhance the effects of each other."

Regarding the effects of the extension of 24-hour foreign exchange trading, which has been in effect since the 6th, he said, "So far, 24-hour trading has not reduced the offshore non-deliverable forward (NDF) market." He added, "It will take time, but ultimately, it could serve as an opportunity to reduce activities that take positions on exchange rates without actual won transactions."

He also mentioned plans to pilot an offshore won settlement system in the fall, which would allow free won settlement among foreigners abroad, in addition to the extension of 24-hour trading.

"We will also observe how the narrowing interest rate gap with the U.S., as we continue our rate-hike trend, affects the NDF market," he added.

(Photo: Yonhap News)

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