Bank of Korea Governor Shin Hyun-song said further appreciation of the South Korean won is desirable, as the currency's sharp rise since the central bank shifted to a tightening stance is strengthening household purchasing power.
Speaking on Tuesday at the International Monetary Fund and World Bank annual meetings in Bangkok, Shin said, "We will maintain a restrictive monetary policy stance until we are confident that inflation will converge to the target level in a timely manner."
A stronger won eases "K-shaped" divergence, lowering the difficulty of policy trade-offs
Shin said the stronger won has tilted the economic balance toward the domestic sector, helping to ease the divergence he described as a "K-shaped economy." He added that inflation, the exchange rate and financial stability are all pointing in the same policy direction, making the trade-offs facing the Bank of Korea easier to manage than usual.
The remarks come ahead of the Bank of Korea's policy decision scheduled for October 22. The central bank had previously raised its benchmark rate by 25 basis points in both July and August, bringing it to 3%. Shin has previously hinted that further tightening would be gradual, as policymakers need to assess the impact of higher borrowing costs.
Shin also said the Bank of Korea will evaluate its six-month rate dot plot after accumulating at least a year of experience. The dot plot was introduced in February under former Governor Lee Chang-yong. He did not provide a timetable and said any evaluation would take place next year or later.
Shin said the projections help convey policymakers' thinking. In August, the Bank of Korea used the projections to show the extent of its monetary policy response alongside a rate hike, which he believes had a positive effect on long-term yields. However, policy guidance still needs to remain flexible so it can respond to new information. Shin said, "We try to find that optimal balance between too much and too little forward guidance."
AI boom and Middle East war intertwine, inflation may stay above target
Such flexibility may be important, as Bank of Korea policymakers are grappling with several conflicting forces affecting the economic outlook. Shin said the AI boom is offsetting the drag from the Middle East war, but the two forces combined are exacerbating inflation. Stronger demand is adding to the cost pressures from the conflict, making it likely that headline and core inflation will remain above the Bank of Korea's 2% target for some time.
The IMF on Tuesday raised its growth forecast for South Korea this year to 3.3%, up 0.7 percentage points from its July estimate, citing demand growth in the semiconductor industry offsetting the negative effects of the war. This aligns with the Bank of Korea's latest forecast. In August, the central bank sharply raised its 2026 growth forecast from 2.6% to 3.3%. The IMF also raised its 2027 growth forecast to 2.8%.
South Korea's exports more than doubled year-on-year in September, reaching a record $120.9 billion, with semiconductor shipments surging 263%. Inflation slowed from 3.1% in August to 2.9%, but remains above the Bank of Korea's target.
Before taking the helm at the Bank of Korea, Shin worked at the Bank for International Settlements for more than a decade. He said tightening policy should also slow the accumulation of financial vulnerabilities. The Bank of Korea's financial vulnerability index is rising, but he expects its peak will not reach levels that trigger alarms.
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