The Bank of Korea stated on July 29 that it expects strong fundamental conditions to limit downward pressure on stock prices amid recent market fluctuations.
In a report submitted to the National Assembly's Economic Committee, the Bank noted that while foreign investors continue to engage in net selling as part of portfolio rebalancing, the large projected operating profits of semiconductor companies could help mitigate this downward pressure.
The Bank observed that since May, significant net selling by foreign investors has intensified, alongside increased leveraged investments, leading to substantial fluctuations in stock prices. It anticipates that the stock market will respond sensitively to external uncertainties, including the outlook for the AI industry, changes in major countries' monetary policies, and global capital flows.
Regarding monetary policy, the Bank indicated it would maintain a tightening stance. It stated, "We believe it is necessary to continue the trend of interest rate hikes, and the timing and pace of any additional increases will be determined by assessing inflationary pressures, economic improvement trends, and financial stability conditions."
In explaining the rationale for raising the benchmark interest rate, the Bank noted that economic growth is strengthening due to favorable semiconductor market conditions, while inflation is expected to exceed target levels for an extended period. It also highlighted ongoing risks to financial stability.
The Bank assessed that inflationary pressures remain high. It projected that future consumer price inflation rates would remain elevated due to uncertainties related to international oil prices and the Middle East situation, alongside increased demand pressures from economic recovery and the transmission of cost shocks. It added that various factors, including international oil prices, exchange rates, summer weather conditions, and government measures to stabilize prices, pose both upward and downward risks to future inflation trajectories.
Concerning the financial system, the Bank expressed growing concerns over the accumulation of financial imbalances. It noted that as housing prices continue to rise, leveraged investments have increased. While rising interest rates may alleviate inflationary pressures and reduce the risk of accumulating financial imbalances, the potential for increased defaults in vulnerable sectors remains a concern.
The Bank also reported that housing-related loans in the financial sector continue to grow steadily, with other loans increasing significantly. It warned that expectations of further increases in housing prices in the capital region, along with improvements in income and asset conditions, could sustain high growth rates, leading to continued pressure on household debt. Therefore, it emphasized the need to remain vigilant regarding related risks.
* This article has been translated by AI.
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