Bank of Korea Deputy Governor Says Rate-Cut Cycle Is Over, Hints at Possible Hikes

 
Bank of Korea Deputy Governor Yoo Sang-dae said it may be time to consider shifting monetary policy toward an interest-rate hiking cycle.

Yoo, in Samarkand, Uzbekistan, for the Asian Development Bank’s annual meeting, made the remarks during a May 3 (local time) briefing with a traveling press pool. He said the economy has been stronger than expected and inflation is likely to run higher than forecast.

“Monetary policy moves in cycles,” Yoo said. He described the rate trend as having been in a downward cycle since October 2024, adding that through the end of last year many on the Monetary Policy Board believed one more cut could end the easing cycle, followed by a shift to hikes at an appropriate time. The central bank cut rates twice last year, in February and May, and has since kept them on hold.

Yoo said the war in the Middle East this year changed the outlook. He said an oil shock from the conflict pushed up prices while hurting growth, creating a “stagflation-like” situation. But he said growth later improved as a semiconductor upcycle strengthened exports and government stimulus helped revive consumer sentiment.

As a result, he said, growth appears resilient while upward pressure on inflation has intensified. “The economy doesn’t seem as weak as we initially thought, and in my personal view monetary policy may shift from cuts to a hiking cycle,” Yoo said. He added that data since April suggest growth will not fall below the forecast of 2.0%, while inflation is likely to exceed the 2.2% projection. “Now is the time to stop cutting and consider hikes,” he said.

Yoo also signaled changes to the central bank’s dot plot, which shows the projected rate path. He said the war broke out between February and April and conditions have changed significantly, so there is no need to cling to the previous dot plot. If growth and inflation conditions are confirmed by the May policy meeting, he said, there is “plenty of room” for the dot plot to move higher than in February.

He said views may differ on whether to focus on the highest point in the distribution or the most frequently marked points such as the average or median, but the overall probability distribution could rise. With uncertainty high and changing daily, he said, the bank needs to watch developments over the next two weeks, but the policy statement would show a different distribution.

On the exchange rate, Yoo said the market’s decisions should be respected but the won’s level appears out of line with fundamentals. He said foreigners often ask why the exchange rate is high when South Korea has relatively strong growth, a current account surplus and solid exports. “It is clearly true that the exchange rate level is high compared with the past,” he said. Still, he said the market does not appear to see major problems with the won trading in the 1,470 to 1,480 per dollar range, and he understands there are no concerns about worsening foreign-currency liquidity or capital outflows.

Yoo also maintained an optimistic view on concerns that export strength is overly concentrated in semiconductors. He said he worries less about the sector’s large share than about what happens when the semiconductor cycle turns down. With expectations growing that the current semiconductor cycle could last considerably longer than in the past, he said, those concerns have eased. Comparing growth with Taiwan, he said South Korea, unlike an economy concentrated in semiconductors, has a broader industrial base including autos, shipbuilding and steel, expressing confidence in the economy’s scale.



* This article has been translated by AI.

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