While the Bank of Korea’s Monetary Policy Committee raised its key interest rate, which is 2.75% per..

Bank of Korea Raises Interest Rates for 2 consecutive Months Following Last Month
Governor’s “Preemptive Response Before Spread of Inflation”
Exchange Rate Stable, but Still High

사진 확대 Bank of Korea Governor Shin Hyun-song explains the background of the rate hike at a press conference on monetary policy direction held at the Bank of Korea’s annex on the 27th. [Courtesy of HAN]

While the Bank of Korea’s Monetary Policy Committee raised its key interest rate, which is 2.75% per annum, to 3.00% on the 27th for the second consecutive month following last month, Bank of Korea Governor Shin Hyun-song said the consecutive hike was a move that was out of practice and was a preemptive response to inflation.

At a press conference on monetary policy direction held at the annex of the Bank of Korea, Governor Shin explained the background of the rate hike and the direction of monetary policy.

Regarding the background of the rate hike, Governor Shin said, “The domestic economy continues to grow higher than expected on the back of strong exports and recovery in domestic demand. As inflation is expected to exceed the target level for a considerable period of time, it is important to prevent the spread of inflation through preemptive responses.” It is necessary to prevent the spread of inflation through preemptive responses.

Regarding the back-to-back (consecutive) increase in the benchmark interest rate following last month, he said, “We can ultimately reduce the cost to the economy by responding early before inflation spreads. Considering a certain amount of interest rate hikes, we will move (time) forward and gain more effectiveness.”

“It gave a strong signal to the market as a move away from convention,” he said. “As the base rate went to 3%, there was a consensus that all actors should check the aftermath.”

사진 확대 Bank of Korea Governor Shin Hyun-song attends a plenary session of the Monetary Policy Committee held at the Bank of Korea in Jung-gu, Seoul on the 27th to preside over the meeting. [Courtesy of HAN]

Regarding the future interest rate hike, he said, “The median of the dot plot (the Monetary Policy Committee’s conditional base rate forecast in six months) is expected to rise once more to 3.25%, so we expect a modest increase,” adding, “We have raised the base rate twice in a row, so we need to check the effectiveness and we expect that there will be such expectations as we have responded early.”

In addition, regarding the exchange rate, it has fallen significantly compared to the end of June and has stabilized considerably, but it is still high historically. Governor Shin said, “Exchange rate predictability is more important than exchange rate level,” adding, “I think we can go toward a stronger side while keeping the center of the foreign exchange market at the center.” We will pay special attention to the exchange rate,” he said.

In addition, Shin said the rate hike will also help increase housing prices in the Seoul metropolitan area and ease household debt growth. He pointed out that housing prices have recently increased by double digits in the Seoul metropolitan area, showing a steep rise in housing prices. “It is impossible to set house prices with interest rates, and monetary policy alone cannot,” he said. “I think this response will help ease the rise in housing prices and household debt in the Seoul metropolitan area.”

He also explained, “There are concerns about vulnerable borrowers due to interest rate hikes, and we are always keeping this in mind,” adding, “We are closely communicating with the government on this issue.” He also explained that the government’s economic growth plan includes support measures for vulnerable borrowers.