Bank of Korea (BOK) Governor Hyun Song Shin reiterated the need to raise the benchmark interest rate ahead of next week's Monetary Policy Board meeting. His view reflects an assessment that inflation and financial stability risks persist while economic growth continues on the back of strong semiconductor conditions.
"Considering inflation running above the target level, improving growth momentum, and rising financial stability risks, we judge that it is necessary to raise the benchmark interest rate at an appropriate time," Shin said in a report to the National Assembly's Finance and Economic Planning Committee on the 9th.
The BOK has kept the benchmark rate frozen at an annual 2.5% since July last year. But the market expects the central bank to raise the rate at the Monetary Policy Board meeting on the 16th of this month, taking into account strong growth, inflationary pressure, and a high exchange rate. Since the May board meeting, Shin has already sent the market rate-hike signals several times at major forums and other venues.
"Going forward, strong semiconductor conditions will continue and tensions in the Middle East will ease, so solid growth will be sustained," Shin said. "In May, we presented this year's growth forecast at 2.6%, and we see additional upward pressure."
He explained the need for a rate hike, saying, "Even as the Middle East situation stabilizes, the ripple effects of the cost increases that have accumulated will continue for some time, and as demand-side pressure grows, the inflation rate will maintain a high upward trend going forward." However, in response to a lawmaker's question on whether the rate would be raised by a "big step" (a 0.5 percentage point hike at once), Shin said, "I was speaking about the general basis," suggesting the possibility is not high.
On the exchange rate, which has been highly volatile recently, he diagnosed it as a temporary phenomenon. "The dollar is strong because of the possibility of changes in U.S. monetary policy," Shin said. "Domestically, there are also factors such as portfolio rebalancing by foreign investors." He added, "The current account surplus is accumulating on a very large scale," and analyzed that "there is considerable room for the won to turn stronger going forward." He also predicted that the net selling of domestic stocks by foreign investors, which has driven down the domestic stock market, will gradually subside in the second half of the year.
Regarding the Korea-U.S. currency swap, Shin said, "There are consultations between governments, and there are always discussions within the framework of cooperation among central banks," but drew a line, saying it is not a mechanism needed at the current point. "The purpose of a currency swap is to provide liquidity when liquidity is depleted," Shin stressed. "In the current situation, liquidity is not lacking."
Meanwhile, Park Hong-keun, Minister of the Planning and Budget Office, also attended the report and announced that he would push for the establishment of a future response fund using additional tax revenue and the reform of the education grant. "Through the future response fund, we will stably secure resources for creating future growth engines and responding to K-shaped polarization," Park said. "For the education grant reform, we plan to narrow differences with the Ministry of Education going forward and ultimately submit a revised bill to the National Assembly."
