BOK governor hints at tightening at policy meeting, international conference and anniversary speech

Inflation pressure mounts as economic growth accelerates

ECB raises rates 0.25 percentage point; US and Japan also in focus

Bank of Korea to decide benchmark interest rate at July 16 monetary policy meeting

Bank of Korea Gov. Shin Hyun-song delivers a speech at the central bank's 76th anniversary ceremony at the BOK annex building Friday morning. Shin said the bank needs to raise interest rates "without delay, with a focus on price stability." [Bank of Korea]
Bank of Korea Gov. Shin Hyun-song delivers a speech at the central bank's 76th anniversary ceremony at the BOK annex building Friday morning. Shin said the bank needs to raise interest rates "without delay, with a focus on price stability." [Bank of Korea]

Bank of Korea Gov. Shin Hyun-song has again raised the prospect of a rate hike, reflecting a broad alignment of economic indicators pointing toward monetary tightening.

According to the Bank of Korea, Shin signaled the need for a rate increase on three separate occasions over roughly two weeks — starting with the monetary policy board meeting on May 28 and continuing through Friday.

At his first post-appointment monetary policy press conference, Shin said he believed "it will be necessary to raise the benchmark interest rate at an appropriate time." He reinforced that hawkish message at the BOK International Conference on June 1, saying "when you consider housing prices, household debt and the exchange rate, all indicators are pointing in the same direction." He went further in his anniversary address Friday, adding that the bank needs to raise rates "without delay" — the first time he addressed the pace of tightening.

The remarks suggest Shin believes there is urgency to moving on rates. A Bank of Korea official said Shin "tends not to use definitive language until he is fully convinced, but once he is, he drives the point hard."

In practice, virtually every major monetary policy indicator — the growth trajectory, inflation, financial stability and the foreign exchange market — is pointing toward a rate hike.

South Korea's economic growth rate is improving sharply, driven largely by the semiconductor sector. Preliminary data showed the economy expanded 1.8 percent quarter on quarter in the first quarter of this year. The Bank of Korea raised its annual growth forecast last month from 2 percent to 2.6 percent, and some analysts now project growth could exceed 3 percent. Rising semiconductor prices have rapidly improved the terms of trade, pushing the nominal growth rate to 10.5 percent. Gross domestic income and gross national income — both measures of real purchasing power — also posted growth rates approaching double digits.

Inflationary pressure is building. As the impact of higher global oil prices takes hold, consumer price inflation climbed to the 3 percent range last month for the first time in 26 months. Core inflation, which had been relatively stable, also edged up to the mid-2 percent range, driven in part by rising prices for some personal services. Core inflation strips out items with high price volatility.

Financial and foreign exchange markets continue to show signs of instability. According to the Korea Real Estate Board, Seoul apartment prices rose an average of 0.27 percent in the second week of June (as of June 8), widening the pace of gains by 0.02 percentage point from the previous week. Data released Thursday by the Bank of Korea showed that household loan balances at deposit-taking banks stood at 1,181.8 trillion won (about $774 billion) at the end of May, up 6.9 trillion won from the end of April — the largest monthly increase since August 2024, when balances rose 9.2 trillion won. Other loans, including unsecured credit loans, jumped 3.7 trillion won, fueled by a surge in debt-financed investing.

The won-dollar exchange rate has also stubbornly held above the 1,500 won level. Some inside and outside the authorities now say 1,500 won has become the "new normal." Through Thursday, the rate had closed above 1,500 won for 18 consecutive trading days — the second-longest such streak on record after 49 consecutive trading days during the 1997-98 financial crisis. On Friday, the won-dollar rate opened at 1,518 won, down 10.9 won.

Major central banks abroad are also sending hawkish signals in quick succession. The European Central Bank raised all three of its key policy rates by 0.25 percentage point Thursday local time, citing inflation concerns stemming from the Middle East — its first rate increase in two years and nine months since September 2023. The US Federal Reserve's Federal Open Market Committee and the Bank of Japan are both scheduled to hold rate-setting meetings next week, and markets expect either a rate hike or a hawkish hold from both.

The Bank of Korea is set to decide its benchmark interest rate at the monetary policy board meeting on July 16. Given Shin's recent string of hawkish remarks, a rate increase at that meeting is widely seen as likely.

In his anniversary address Friday, Shin also outlined three structural priorities for the central bank: macroprudential policy coordination, won internationalization and raising the economy's growth potential.

"We must continue to closely monitor potential risks in the housing market and household debt, and maintain macroprudential policy coordination with the government," he said, adding that efforts should continue over the medium to long term to ease the concentration of activity in the Greater Seoul area and redirect capital toward productive sectors.

Shin also said it is important to deepen the foreign exchange market and strengthen its fundamentals through won internationalization. He said the bank would work with relevant agencies to improve foreign investors' access to the won market and bring offshore non-deliverable forward trading onshore — through the planned 24-hour foreign exchange market opening next month and a subsequent offshore won settlement system. He also cautioned that "much of the current economic situation reflects a favorable shift in external conditions," and said it is important "to calmly assess reality and prepare for future changes rather than rest on immediate results." He added that expanding investment to raise future growth potential — drawing on improved fiscal capacity and corporate financial conditions — is essential, and called for continued efforts to ease polarization across regions, generations and social strata, as well as sustained work to address structural challenges such as demographic change.


kimstar@heraldcorp.com