Bank of Korea Governor Hyun Song Shin speaks at a press conference on the Monetary Policy Board’s policy direction, held at the Bank of Korea in Seoul’s Jung district on the 27th. Joint Press Corps
Bank of Korea Governor Shin Hyun-song repeatedly used the words “preemptive” and “early response” at a press conference on the 27th, held after the central bank raised its base rate to 3% from 2.75%. Moving faster than markets expected, he argued, is what makes it possible to block the spread of price increases while also stabilizing home prices, household debt and the won. The bank’s decision to lift next year’s growth forecast to 2.9% and to put core inflation — a key reference point for rate decisions — at 2.5% could likewise be read as a hawkish signal favoring tighter money.
On the rate increase, Shin said, “Most research finds that a preemptive response can stabilize inflation expectations quickly, shortening the intensity and duration of tightening and ultimately easing the burden on growth.” He added, “There is a saying that what you could block with a hoe, you end up blocking with a rake. It means a late response costs that much more, and this time we chose to use the hoe.”
Consumer inflation is indeed likely to bounce back above 3% in August, and Seoul apartment prices are climbing steeply, led by mid-priced and lower-priced areas such as northern Seoul. According to the Korea Real Estate Board, Seoul apartment prices rose 0.29% in the fourth week of August, as of the 24th, from the previous week. The pace of increase widened by 0.07 percentage point from the week before. Broadly defined household debt also topped 2,000 trillion won for the first time as of the second quarter of this year. Shin said he expects that “a preemptive response through rate increases will help financial stability by easing not only prices and the exchange rate but also the rise in housing prices in the greater Seoul area and the growth of household debt.”
The growth forecast the central bank released the same day also weighed on the rate decision. The bank put this year’s real gross domestic product growth at 3.3%, raising it by 0.7 percentage points from its May projection in the space of three months. That is the largest upward revision in five years, since it lifted the figure to 4% from 3% in May 2021. The reason, the bank said, is that the semiconductor-led upturn will carry strongly into next year.
Yet even after the unusual back-to-back increases, the prevailing view in the market is that investors can breathe easier for now. The central bank said it needs to watch the effects of the two consecutive hikes, effectively signaling a slower pace for some time. Among analysts, too, the dominant reading of the August rate-setting meeting is a hawkish decision paired with a dovish path ahead.
Shin himself said, “Because we have raised rates twice now, we need to see whether the exchange rate, import prices and inflation stabilize,” effectively suggesting there will be no increase at the next scheduled meeting in October. The Monetary Policy Board also removed the line saying it needs to continue raising rates from the policy statement issued that day, adding further weight to the case for a slower pace.
Board members themselves see the next increase most likely coming next year. In the dot plot of board members’ base rate projections six months ahead, released the same day, 10 of the 21 dots were at 3.25%, six at 3.5% and five at 3%. A large share of members expect one more increase by February next year. Compared with the dot plot three months earlier, the median rose to 3.25% from 3%, but market participants say the reading leans dovish given the upgraded growth outlook.
On the median settling at 3.25%, Shin said it means “raising rates about one more time than now over the next four meetings,” adding, “We expect a gradual pace of increases ahead.”
With the rate path seen as dovish, analysts say bond yields, which had surged recently, will peak and stabilize lower. Yoon Yeo-sam, a researcher at Meritz Securities, said, “The likelihood that market rates have confirmed a peak has grown after the August meeting,” adding that he sees 3.8% on three-year treasury bonds and 4.2% on 10-year bonds as appropriate levels.
Some caution against rushing to add bond positions, however. Park Jun-woo, a researcher at Hana Securities, said, “Yields on government bonds could fall on expectations of a slower pace of hikes, but given that we are at the start of an economic expansion, investors should be careful about buying more.”