“We will determine the timing and pace of further rate increases while closely monitoring inflation, growth and financial stability,” Shin said Monday in opening remarks at his first parliamentary audit.
The Bank of Korea (BOK) raised its base rate by 25 basis points in July and August to 3.00 percent. Its next monetary policy meeting is scheduled for Oct. 22.
Shin said inflation was likely to remain above the central bank’s 2 percent target for a considerable period as accumulated cost pressures continued to feed through to prices and demand-side pressures gradually strengthened.
Lawmakers challenged whether domestic demand was strong enough to justify the back-to-back increases.
Democratic Party lawmaker Kim Young-hwan argued that recent inflation had been driven mainly by oil prices, exchange-rate effects and other cost factors rather than broad-based demand.
Shin acknowledged that higher energy costs had contributed significantly to inflation but said improving incomes were expected to strengthen demand. He stressed the need to act before those pressures materialized and higher inflation expectations became entrenched.
Democratic Party lawmaker Kim Tae-nyeon separately questioned whether the semiconductor-led expansion was spreading sufficiently to employment, production and domestic demand to justify tighter monetary policy.
Higher borrowing costs were weighing on regional economies, small businesses and households, Kim said, even as much of the country’s growth came from the semiconductor boom.
Shin rejected the view that economic strength was confined to chips.
“Even excluding semiconductors, the GDP gap is close to the threshold at which it can generate inflationary pressure,” Shin said, adding that the central bank should set monetary policy based on the economy as a whole.
Shin also defended the timing of the BOK’s tightening when questioned by Democratic Party lawmaker Moon Jin-seok.
Raising rates before the U.S. Federal Reserve moved in September gave Korea more time for the adjustment to be reflected in market prices, he said. It also imposed a smaller economic cost than being forced into defensive tightening later.
The tightening nevertheless carries costs for weaker parts of the economy.
Shin acknowledged that higher rates hit vulnerable borrowers particularly hard and stressed the importance of targeted fiscal support, while maintaining that monetary policy should remain independent.
Housing prices in the Seoul metropolitan area, household debt and the potential deterioration in vulnerable borrowers’ finances remain risks complicating the BOK’s next decision.
The interaction between fiscal and monetary policy drew further scrutiny.
People Power Party lawmaker Park Soo-young questioned whether expansionary fiscal policy could work against the BOK’s efforts to restrain liquidity and inflation.
“Fiscal sustainability is absolutely important,” Shin said, adding that the central bank would continue to express its views to help coordinate fiscal and monetary policies.
Government bond yields fell and the won strengthened as Shin largely reiterated his earlier policy stance.
The three-year government bond yield fell 4.0 basis points to 3.943 percent in morning trading, while the benchmark 10-year yield dropped 7.1 basis points to 4.324 percent. The five-year yield declined 4.0 basis points to 4.118 percent.
The won traded around 1,334 per dollar at about 1:30 p.m., strengthening by about 8.8 won from the previous session.
Shin gave no clear signal that another increase would come as early as October, while keeping further tightening on the table. His emphasis on having acted preemptively suggested the BOK retains room to decide whether to move at its Oct. 22 meeting or wait until Nov. 26.
AJP Takeaways
- BOK Gov. Shin Hyun-song defended the July and August rate hikes as preemptive moves that gave policymakers more room before the U.S. Federal Reserve tightened policy.
- Shin pushed back against claims that inflation and growth were driven mainly by external costs and semiconductors, saying underlying demand pressures remained significant.
- The BOK has kept further tightening on the table but has not committed to a third consecutive rate hike at its October 22 meeting.
Copyright ⓒ Aju Press All rights reserved.