BOK Governor Rhee Says August Preemptive Rate Hike Bought Time, Reduced Economic Costs

Bank of Korea Governor Rhee Chang-yong said the central bank’s decision to raise its benchmark interest rate preemptively in August helped stabilize financial markets and reduce future economic costs.

Testifying at a parliamentary audit at the National Assembly on Oct. 12, Rhee was asked about the side effects of forward guidance, or signaling the future path of monetary policy in advance. He said forward guidance has both advantages and drawbacks, while emphasizing the need for preemptive policy action.

Rhee said the Bank of Korea adopted a tightening stance earlier than other major economies. That policy direction was already largely reflected in market prices from May and June, he said, and signaling the possibility of a rate increase in advance helped prevent sharp market swings later.

“By raising rates preemptively in August, I think we moved ahead of the Fed’s rate increase in September and bought time,” Rhee said. “The economic cost is much lower than being forced to raise rates later in a defensive move after falling behind the market.”

He also pointed to the recent stability of South Korea’s government bond market. Korean government bond yields have remained relatively stable over the past two to three weeks compared with those in other major economies, he said. Announcements on reducing government bond issuance and buying back bonds if needed also helped stabilize the market, he added.

Rhee acknowledged the short-term burden from higher rates, but said the benefits of acting early were greater. “There is pain when rates go up, but by moving preemptively we can keep the market anchored and ultimately reduce the overall cost,” he said.