Bank of Korea Deputy Governor Yoo Sang-dae speaks at a press briefing Tuesday morning. [Bank of Korea]
Bank of Korea Deputy Governor Yoo Sang-dae speaks at a press briefing Tuesday morning. [Bank of Korea]

Bank of Korea Deputy Governor Yoo Sang-dae said Tuesday that recent stock market volatility and the declining exchange rate are "not that important" to monetary policy, signaling that the central bank remains open to further rate hikes as key indicators continue to point in that direction.

Speaking at a press briefing at the Bank of Korea's annex building Tuesday morning, Yoo said two major data releases had come out since the July monetary policy meeting — second-quarter GDP and July inflation figures. He added that if he were to participate in the August Monetary Policy Board meeting, he would also be watching customs-cleared export data and credit card spending.

"Ultimately, we will look at the inflation path and outlook through the economic forecast," Yoo said. He added that the rate decision would factor in whether the data aligned with expectations, along with daily customs export figures and credit card performance.

Responding to suggestions that the Bank of Korea might be more cautious about raising rates given the recent stabilization of the exchange rate and heightened stock market volatility, Yoo said those two factors "give the Bank of Korea some breathing room, but are not traditionally that important to monetary policy." He said greater weight would be placed on whether core inflation remains persistently elevated and whether economic growth continues. "We determine monetary policy by looking at the growth outlook, the inflation outlook and financial stability conditions," he added.

On the question of where the terminal rate might land, Yoo noted that rates had risen to 3.5 percent following the supply shock from the Ukraine war and the surge in post-pandemic inflation. "I don't think inflation will rise that high again," he said. Still, he cautioned that as core inflation picks up and demand-side price pressures build alongside the economic recovery, inflation is expected to rise gradually and persistently — and that persistence will require careful monetary policy thinking.

On when the tightening cycle might end, Yoo said monetary policy must ultimately smooth out the amplitude of the business cycle and bring inflation back to a stable level quickly. Rather than targeting exactly 2 percent, he said tightening could conclude once "inflation has come into a stable range and is on a downward trajectory below a certain level."

On recent movements in the won-dollar exchange rate, Yoo said the rate "is still high when you consider its effect on import prices." He noted that from late last year through early this year, short-term and temporary factors — most notably supply-demand dynamics — had a far greater influence on the exchange rate than fundamentals or medium- to long-term drivers.

He said the influence of supply-demand factors was fading as the Bank of Korea raised rates, and that the impact of the trade surplus — a more fundamentals-based factor — was growing. "The interest rate differential between Korea and other countries is narrowing, and expectations are forming that it could narrow further. The government has also signaled its commitment to the exchange rate market," he said. "We are now in a situation where fundamentals-based, medium- to long-term factors are outweighing temporary ones."

Even so, Yoo said he did not expect the exchange rate to fall quickly, as temporary factors such as supply-demand dynamics and market sentiment remained. "But if you ask me about the direction, it will be downward," he said. "The exchange rate will stabilize, even if there is some volatility along the way."

Yoo will step down on Aug. 20 after completing his three-year term.


kimstar@heraldcorp.com