Bank of Korea Governor Shin Hyun-song explained today (the 22nd) that the decision to freeze the benchmark interest rate was the result of gaining room to adjust the pace of rate hikes following consecutive increases in July and August.

However, he made it clear that the tightening stance will continue as economic growth and inflation momentum are expected to be stronger than initially projected.

During a press conference held after the Monetary Policy Board froze the benchmark rate this morning, Governor Shin stated, "During the August hike, I described it as 'stopping with a hoe what should have been stopped with a shovel,' and this freeze is the 'fruit of working with that hoe.'"

He evaluated that preemptive responses in July and August provided leeway to implement policies tailored to the domestic economy, while also stabilizing the exchange rate and buying time.

Regarding the unanimous decision to freeze the rate, he explained, "There was a strong consensus on economic conditions such as inflation and growth, as well as the overall evaluation of preemptive monetary policy."

He emphasized, "Thanks to preemptive responses, domestic financial markets remained stable and exchange rates stabilized downward despite the U.S. Federal Reserve's rate hike last September."

He added, "While upside risks to growth and inflation appear to have grown compared to the August forecasts, we determined that it is not too late to verify this further through additional data such as third-quarter real gross domestic product (GDP) and October inflation trends."

Regarding future monetary policy, he strongly hinted at additional hikes.

The board projected that this year's consumer inflation and core inflation rates will largely align with August forecasts (2.7% and 2.5%, respectively), but will exceed previous forecasts (2.3% and 2.5%) next year.

Growth rates for this year and next year are also expected to significantly exceed the August forecasts (3.3% and 2.9%, respectively).

Governor Shin stressed, "Because growth and inflation momentum are expected to be even stronger than the August forecasts, we need to maintain the current restrictive policy stance," adding, "We will respond until we are confident that inflation is stably converging toward the target level (2%)."

Regarding the 2% target, he said, "Rather than achieving the inflation target immediately next year, the principle is to achieve it within the timeframe of implementing monetary policy while considering other conditions," adding, "We expect it to approach the target level the year after next."

On the terminal rate level for the current tightening cycle, he stated, "We do not necessarily have to follow bond market estimates," and "We will always refer to new data and operate monetary policy with an open mind."

Regarding the exchange rate, Governor Shin diagnosed that although it has recently stabilized, the Korean won remains weak based on the real effective exchange rate.

Commenting on the current exchange rate level, he explained, "The high exchange rate situation in early summer had very exceptional and abnormal aspects," and "The rapid decline and stabilization trend of the exchange rate was a process of reversing that abnormality."

He added, "Predictability is most important in exchange rates," and "Based on the real effective exchange rate, the won is still weaker than in past years."

He explained that because the U.S. dollar has been strong over the past few years, it is important to look at the Bank for International Settlements (BIS) real effective exchange rate, which considers trading partners' weights; the BIS real effective exchange rate stood at 89 as of the end of August, lower than the average (101).

Governor Shin noted, "As the exchange rate stabilized downward, it had the effect of lowering import prices," and "Research results show that a 10% drop in the exchange rate increases the purchasing power of the lowest income bracket (first quintile) by over 0.4%, proving to be quite beneficial in resolving polarization."

Regarding fiscal spending, he re-emphasized that once spending is increased, it is difficult to roll back, and fiscal soundness must be taken into account.

Governor Shin stated, "If continuous spending arises from temporary fiscal resources, it can be difficult to reverse later," adding, "I expect authorities to monitor sustainability well, and ultimately, the National Assembly must conduct strict reviews."

Expressing concern over a ceiling price system on petroleum, he warned, "The longer it lasts, the more distortions will occur in the price structure, making it quite difficult to reverse," and "If prolonged, it will cause significant problems for public finances."

Analyzing recent stock market adjustments, Governor Shin suggested that the real economy could be temporarily affected.

He said, "Stock prices have undergone significant adjustments recently, and we view this as having some impact on the real economy," adding, "We judge that there is a temporary, minor adjustment in consumption."

He noted, "As I mentioned during the July monetary policy meeting, for semiconductors, it is more important to look at the price itself rather than the stock price," and "Looking at long-term contracts and spot prices, prices themselves are being maintained at a fairly solid level."

(Photo: Yonhap News)