Bank of Korea Gov. Shin Hyun-song (far right) answers questions from lawmakers at a plenary session of the National Assembly's fiscal and economic planning committee on Wednesday. [Yonhap]
Bank of Korea Gov. Shin Hyun-song (far right) answers questions from lawmakers at a plenary session of the National Assembly's fiscal and economic planning committee on Wednesday. [Yonhap]

Bank of Korea Gov. Shin Hyun-song again raised the possibility of additional interest rate increases Wednesday, saying the central bank needs to continue on its rate-hiking path.

Speaking at a morning briefing before the National Assembly's fiscal and economic planning committee, Shin said the BOK raised its benchmark interest rate from 2.5 percent to 2.75 percent at its July meeting after weighing overall policy conditions," adding that "the timing and pace of further increases will be determined as we monitor the degree of inflationary pressure, the trajectory of economic improvement and financial stability conditions."

Earlier, on July 16, the BOK's Monetary Policy Board signaled the possibility of additional hikes in its monetary policy statement, saying it "judges that monetary policy needs to continue on a rate-hiking path."

Shin said the Korean economy has seen growth momentum strengthen, with exports and investment — led by the semiconductor sector — maintaining strong expansion driven by the global spread of AI, while private consumption has also held up well." He added that "the semiconductor sector's strong performance is expected to continue and gradually spread to other sectors, sustaining robust growth going forward.

According to the BOK, real GDP grew 0.6 percent in the second quarter from the previous quarter, based on a preliminary estimate — three times the 0.2 percent growth the central bank had projected in May. Year-on-year growth came in at 3.7 percent. At this pace, the BOK expects the economy to comfortably achieve annual growth in the 3 percent range this year.

In its written briefing submitted to the National Assembly, the BOK said the global semiconductor cycle is expected to remain in expansion for a considerable period, driven by rising demand for computing power from the spread of AI, continued investment by major tech companies to secure competitive advantage, and supply constraints stemming from increasingly complex manufacturing processes. The bank cautioned, however, that downside risks remain, including financial market corrections triggered by concerns over AI profitability, a pullback in physical investment by big tech firms, and energy bottlenecks.

On inflation, the BOK said prices are expected to remain above the target level for a considerable period, as uncertainty over global oil prices tied to the situation in the Middle East persists, the effects of previously elevated costs and exchange rates continue to feed through, and demand-side pressure gradually builds on the back of income gains.

The BOK added in its briefing materials that improvements in consumption and investment, along with the pass-through effects of cost shocks, would act as upward pressure on prices. It projected that from the second half onward, inflation would remain above target as price increases in manufactured goods and personal services widen, even as uncertainty over global oil price movements stays elevated.

Volatility has also risen in financial and foreign exchange markets. Shin said the won-dollar exchange rate surged sharply on persistent uncertainty surrounding the Middle East situation and a stronger US dollar, before falling back to the mid-to-late 1,400 won range as foreign exchange supply and demand improved from July onward." He noted that "government bond yields rose substantially, influenced by domestic and overseas inflation concerns and shifting expectations for monetary policy, and have since fluctuated in line with developments in the Middle East." He added that stocks have undergone a sharp correction with high volatility, driven by heightened concerns over AI investment and large-scale net selling by foreign investors.

Shin said the domestic financial system has remained broadly stable despite high external uncertainty, supported by the economy's expanding growth momentum and the resilience of financial institutions. He cautioned, however, that elevated volatility in financial and foreign exchange markets, along with the risk of growing financial imbalances from rising housing prices in the Greater Seoul area, remain as potential sources of instability.

With Shin repeatedly flagging the possibility of further rate hikes, markets are closely watching whether the BOK will raise rates for a second consecutive month in August. July inflation data, due for release in early August, is expected to be a key gauge, given that second-quarter economic growth came in far above expectations.

Meanwhile, Shin addressed questions raised during his April confirmation hearing about his children's nationality, saying the matter "has been fully resolved."


kimstar@heraldcorp.com