Bank of Korea Deputy Governor Yoo Sang-dae stated on August 11 that "the possibility of an additional interest rate hike is high unless there are significant economic shocks."
During a press conference held at the Bank of Korea in Jung-gu, Seoul, Yoo responded to a question regarding whether the recent remarks by the Monetary Policy Committee about the need to maintain a tightening stance implied that further rate increases would not be limited to just one.
He noted, "The direction of interest rate increases or decreases corresponds to the economic cycle," adding, "While the speed and magnitude of rate hikes are complex issues, what is certain is that we have set the benchmark rate higher in this cycle." He further stated, "Additional hikes will follow in this cycle, and the timing and pace will be determined based on data."
Yoo acknowledged that while the recent inflation rate is lower than during the previous rate hike period following the outbreak of the Ukraine war, the upward trend could persist for an extended period.
He remarked, "This time, I do not foresee inflation rising to the levels seen during the Russia-Ukraine war. However, demand pressures from economic recovery will gradually increase core inflation, and while the magnitude may not be large, its persistence will pose challenges for monetary policy."
When asked about the potential end of the current monetary tightening cycle, Yoo said, "It is not appropriate for me to answer that as I approach my retirement next week," but added, "While inflation is not expected to rise as high as during the Russia-Ukraine war or previous hikes, demand pressures will likely keep it above target levels for a considerable time."
He emphasized the need to closely monitor the Bank of Korea's growth outlook and inflation trajectory, particularly the economic forecast to be released on August 27.
As he prepares to retire on August 20, Yoo indicated that he would assess the upcoming monetary policy decisions based on daily customs export figures, credit card usage data, and the Bank of Korea's economic outlook materials.
Reflecting on past inflationary periods in the U.S., he noted that the longer inflation exceeds target levels, the stronger the pathways for expected inflation and wage increases become.
Yoo stated, "If people do not believe that inflation will converge to the target level, a situation where inflation anchoring does not work well could lead to slower declines in inflation even with monetary tightening, negatively impacting production."
He also mentioned that raising interest rates could help temper risk appetite, contributing to the alleviation of financial imbalances.
Regarding the recent decline of the exchange rate to the low 1400s, he remarked that while it provides some leeway for interest rate decisions, it is not a critical factor. He stated, "Exchange rates and stock levels are not traditionally significant factors for central banks. The most important considerations are whether core inflation will remain high and whether economic growth will continue." He added that despite the recent drop, the 1400 level remains quite high and poses significant upward pressure on prices.
However, he projected that the exchange rate would stabilize downward in the medium to long term.
Yoo explained that from late last year to early this year, short-term factors such as supply and demand and expectations played a larger role in determining the exchange rate than fundamentals, which led to a significant increase. He noted that recently, the influence of supply and demand factors has diminished, while the impact of long-term factors such as interest rate differentials and current account surpluses has grown.
He concluded, "While supply and demand factors and expectations still exist, I do not foresee a rapid decline in the exchange rate, but if asked for a direction, I would lean towards a downward trend."
* This article has been translated by AI.
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