Speaking at a ceremony marking the BOK’s 76th founding anniversary, Shin said growth, inflation and financial stability conditions are pointing “relatively clearly in one direction” from a monetary policy perspective.
“Monetary policy often faces trade-offs among policy variables, but such trade-offs are not large at the moment,” Shin said. “Therefore, it is necessary to place priority on price stability and raise interest rates without delay.”
The remarks sharpened expectations that the BOK could begin raising rates as early as next month, after keeping its benchmark rate unchanged at 2.50 percent in May.
Shin said Korea’s economy has expanded sharply despite heightened uncertainty from the prolonged Middle East conflict, supported by robust semiconductor exports tied to the global spread of artificial intelligence.
The economy grew 1.8 percent from the previous quarter in the first quarter, far exceeding earlier expectations, while nominal growth reached an unusually strong 10.5 percent as higher chip prices improved the country’s terms of trade.
He said the economy is expected to maintain solid growth as the semiconductor upcycle continues and higher nominal GDP supports tax revenue, income, investment and domestic demand, but warned that the recovery remains heavily dependent on the information technology sector.
Inflation has become a more urgent concern, with consumer inflation rising into the 3 percent range in May as higher global oil prices filtered through to domestic prices.
Core inflation, which had previously shown signs of stabilization, also moved up to the mid-2 percent range, while prices of daily necessities rose faster than headline inflation and raised the risk that inflation expectations could become more entrenched.
“Inflation is expected to remain above the target level for a considerable period,” Shin said, noting that supply shocks are spreading and demand-side price pressure is also increasing despite government efforts to ease upward pressure.
Shin framed preemptive action on inflation as a measure that also protects lower-income households, saying the burden of rising prices falls relatively more heavily on them.
He acknowledged that higher interest rates would increase debt-servicing costs for households and companies, but said targeted relief for vulnerable borrowers would be more effectively handled through fiscal policy because monetary policy affects the market broadly.
Financial stability risks also featured prominently in Shin’s remarks, as housing prices and rents in the Seoul metropolitan area continued to rise sharply and expectations for further increases strengthened again.
He also warned that the rapid increase in leveraged stock investment, often referred to in Korea as “bittoo,” or borrowing to invest, could amplify individual losses and deepen market volatility when prices correct.
On the foreign exchange market, Shin said the won-dollar exchange rate has remained elevated in the 1,500 won range despite a rising stock market and a large current account surplus, as foreign investors continued to pull money from Korean equities.
Still, he said market participants expect the won to gradually stabilize as the large current account surplus increases demand for the local currency through corporate tax payments and domestic investment.
Shin said the BOK will work with relevant authorities to deepen the local foreign exchange market through 24-hour trading and a future offshore won settlement system, aiming to absorb more offshore non-deliverable forward trading demand into the onshore market.
The BOK’s shift comes as a growing number of central banks are turning more hawkish in response to renewed inflation pressure from higher energy costs, currency weakness and financial market volatility.
The European Central Bank raised its three key policy rates by 25 basis points on Thursday, while Bank Indonesia lifted its benchmark BI-Rate by 25 basis points earlier this week to 5.50 percent.
The Bank of Japan is also expected to join the tightening cycle next week, with markets widely expecting it to raise its short-term policy rate to 1.0 percent from the current 0.75 percent at its two-day meeting starting Monday.
Financial markets gave a mixed response to Shin’s renewed tightening signal.
The won-dollar exchange rate opened Friday at 1,518.0 won per dollar, down 10.9 won from the previous session, signaling some relief for the local currency but still leaving it above the psychologically sensitive 1,500 won level.
The KOSPI opened 499.90 points, or 6.44 percent, higher at 8,263.85 and extended gains of more than 7 percent in early trade, with foreign investors purchasing more than 1 trillion won worth of shares as improved risk appetite outweighed rate-hike concerns.
In the bond market, the yield on three-year government bonds fell 5.5 basis points to 3.849 percent, while the 10-year yield dropped 6.0 basis points to 4.240 percent by the morning close.
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