The Bank of Korea's senior deputy governor, Ryoo Sang-dai, stated on Tuesday that the likelihood of a further benchmark interest rate hike is "very high" barring an extreme shock, with just one week left in his term. He specifically pointed to wage increases in the information technology sector, driven by the semiconductor boom, which are translating into persistent upward price pressure.
Speaking at a press conference at the Bank of Korea headquarters in Jung-gu, Seoul, Ryoo, whose three-year term as a member of the Monetary Policy Committee ends on August 20, made his stance clear. He noted that the core driver of current price increases has shifted from external supply shocks to domestic demand. "Worryingly, wage increases in the IT sector are becoming a source of upward pressure on prices," Ryoo said. "The magnitude of price increases may not be large, but their persistence will be very strong." This suggests that the consumer price index will likely remain above the central bank's 2% target for an extended period, a situation that will be difficult to change easily.
Ryoo elaborated that while previous inflation was primarily driven by supply-side shocks like international oil prices, South Korea's semiconductor export boom is now boosting income, expanding consumer demand, and creating a new cycle of price increases. He emphasized that compared to demand-driven inflation, the central bank is less concerned about supply shocks, such as those from Middle East geopolitical conflicts, because a domestic demand recovery itself generates gradual yet persistent price pressure.
This assessment is supported by recent data. South Korea's headline inflation rate fell to 2.8% in July, the lowest in three months, but the core inflation rate edged up to 2.6%, indicating that underlying price momentum has not faded after stripping out energy and food. The economy grew 0.6% quarter-on-quarter in the second quarter, exceeding market expectations, while July exports, adjusted for working days, surged nearly 70% year-on-year, showing that chip demand driven by the global AI boom continues to strongly power the trade-dependent economy.
Last month, the Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75%, marking the first tightening move in three and a half years, and hinted that the door remains open for further action. At the time, Governor Rhee Chang-yong said that future meetings would be "live discussions" with no options ruled out. Many market participants are now looking ahead to the next rate-setting meeting on August 27, with the possibility of a consecutive rate hike still widely priced in.
Regarding whether to raise rates again at this month's meeting, Ryoo shared his decision-making approach. "If I were to attend the August meeting, I would carefully review export customs data and credit card spending figures, while also considering the central bank's updated economic growth and inflation outlook," he said. He stressed that because monetary policy must be forward-looking and preemptive, it is necessary for policymakers to take further action after reviewing growth and inflation prospects.
When discussing the impact of exchange rate and financial market volatility, Ryoo indicated that these factors are not the primary considerations for rate decisions. However, the recent stabilization of the Korean won and stock market volatility have provided the Monetary Policy Committee with more comfortable room for decision-making. "Increased stock market volatility and a more stable exchange rate give committee members a bit of psychological relief," he said. "But from a traditional perspective, neither is a decisive factor. What is truly crucial is whether economic growth can be sustained." He noted that the committee places greater emphasis on whether core inflation will remain high, whether economic momentum can continue, and financial stability issues.
Regarding the won's trajectory, Ryoo assessed that although the dollar-won exchange rate has fallen from previous highs to around 1,410 won, this level is still "very high," continuously posing upside risks to prices by pushing up import costs. He predicted that while the won-dollar exchange rate might not depreciate rapidly due to some short-term factors, the won is expected to strengthen further in the long-term trend. Supporting factors include a record trade surplus and current account surplus, as well as expectations of a narrowing interest rate differential between South Korea and the US. Over time, he believes these fundamental forces will increasingly dominate the foreign exchange market.
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