Tension Mounts Ahead of Bank of Korea's Interest Rate Decision

On the morning of the 27th, the atmosphere in the Bank of Korea's Monetary Policy Committee (MPC) meeting room was notably tense. With the decision on whether to implement a so-called 'back-to-back' interest rate hike following last month's increase, reporters focused their attention on Bank of Korea Governor Shin Hyun-song.

Governor Shin entered the meeting room at 8:59 a.m., wearing a navy jacket and a blue patterned tie. After taking his seat with a serious expression, he struck the gavel to signal the start of the meeting and requested reporters to leave.

When reporters asked for a comment, Governor Shin briefly replied, "I will speak downstairs (in the briefing room)." Given the impending decision on the base rate, he did not provide any additional messages that could indicate the direction of monetary policy.

MPC members arrived before Governor Shin. Starting at 8:54 a.m., the newly appointed Deputy Governor Kwon Min-soo was the first to enter, followed by committee members Lee Soo-hyung, Hwang Geon-il, Jang Yong-seong, and Kim Jong-hwa at 8:57 a.m.

The atmosphere among reporters was charged, with about 40 attendees, including Bank of Korea executives and journalists, filling the meeting room. Reporters remained alert to the expressions and comments of Governor Shin and the MPC members right up until the meeting began.

Market speculation is divided on whether the Bank of Korea will maintain the base rate at 2.75% or implement an additional 25 basis point (bp) hike (1 bp = 0.01 percentage points). A survey conducted by Aju Economy among seven domestic macroeconomic and bond experts revealed that four (57.1%) expect a rate hike, while three (42.9%) predict a hold.

Support for an additional hike stems from stronger-than-expected growth and high inflation levels. Last month, the Bank of Korea raised the base rate by 25 bp, marking its first tightening move in three and a half years since January 2023. At that time, Governor Shin indicated that the decision for August would be based on the second quarter's real GDP growth rate and July's core inflation rate, stating, "We will watch closely."

The preliminary report for the second quarter's real GDP growth rate showed an increase of 0.6% compared to the previous quarter, significantly exceeding the Bank of Korea's May forecast of 0.2%. Following a rebound from -0.1% in the fourth quarter of last year to 1.8% in the first quarter of this year, the economy continued to show relatively solid growth in the second quarter. Income conditions also improved significantly, with the second quarter's real gross domestic income (GDI) rising 15.6% year-on-year, the highest growth rate since the first quarter of 1988 (16.4%).

However, inflation remains a concern. The consumer price inflation rate for July was 2.8%, down from 3.2% in June, but still above the Bank of Korea's inflation target of 2%. Notably, the core inflation rate reached 2.6%, the highest level since December 2023 (2.8%), influenced by rising durable goods prices.

On the other hand, arguments for holding the rate steady are also strong. Given that rates were already raised last month, there is a belief that it is unnecessary to implement another hike without first assessing the effects of the previous increase. While inflationary pressures remain due to rising international oil prices and domestic recovery, recent declines in the won-dollar exchange rate and stock market adjustments are seen as factors that may reduce the urgency for further tightening.

The time lag of monetary policy also supports the case for holding rates steady. It takes considerable time for an interest rate hike to affect bank lending rates and subsequently influence consumer and business spending, as well as inflation and the real economy. Therefore, it is possible to consider additional adjustments after assessing the impact of last month's increase.

The upcoming MPC meeting will focus on whether to respond to stronger growth and rising core inflation with an additional hike or to moderate the pace while observing the effects of last month's increase.

Meanwhile, the Bank of Korea is expected to announce the results of the base rate decision and projections for growth and inflation around 10 a.m. A briefing on the monetary policy direction will take place at 11:10 a.m., providing insights into the MPC's assessment of recent economic conditions and future monetary policy operations.