BOK’s Shin Says Preemptive Inflation Response Needed, Leaves Door Open to More Hikes

Bank of Korea Governor Shin Hyun-song left the door open to further benchmark interest-rate increases, saying inflation pressures could persist longer than expected.

In opening remarks at a press conference after the Monetary Policy Board meeting on August 27, Shin said the domestic economy continues to post solid growth, inflation is set to remain above target for an extended period and financial-stability risks also require attention. The timing and pace of any additional rate increases will be determined based on incoming data, he said.

The BOK’s Monetary Policy Board raised the benchmark interest rate by 25 basis points to 3.00% from 2.75% on August 27. It was the second straight increase, following a hike in July.

Shin said the back-to-back moves reflected stronger-than-expected growth and mounting price pressures. He said South Korea’s economy is projected to maintain solid growth this year and next, supported by a strong semiconductor cycle and improved income conditions. Core inflation is also projected to remain high through next year, increasing the risk that price gains become broader and more persistent.

He also stressed the need for monetary policy to act before inflation pressures spread more widely. Preemptive policy action is needed to promote stability in inflation and the broader macroeconomy, Shin said. Most research shows that acting early can stabilize inflation expectations more quickly than a delayed response, reducing the intensity and duration of tightening and ultimately easing the burden on growth.

Shin said higher rates should also help curb financial imbalances. With home prices in the Seoul metropolitan area rising and household debt growth accelerating, the latest increase could help ease those risks.

The BOK on August 27 forecast economic growth of 3.3% this year and 2.9% next year. That marked increases of 0.7 percentage point and 0.8 percentage point, respectively, from its May forecasts of 2.6% and 2.1%. It projected consumer inflation at 2.7% this year and 2.3% next year, while core inflation was forecast at 2.5% in both years.

Still, the central bank will maintain liquidity support for small and midsize companies. Shin said the rate on the Financial Intermediation Support Facility will remain at 1.25%, and said the decision, together with government support measures, should help ease financing burdens for smaller businesses.