The Bank of Korea (BOK) stated on Wednesday that it is necessary to maintain a tight monetary policy stance due to persistently high inflation pressures and the expectation of sustained economic growth. Earlier this month, the central bank raised its benchmark interest rate by 25 basis points to 2.75%, marking the first rate hike in three and a half years.
The BOK noted, "Going forward, we believe it is necessary to maintain the trend of rate increases and will decide on the level and timing of rate hikes based on the degree of inflationary pressure, economic trends, and financial stability." During a session of a parliamentary committee, BOK Governor Rhee Chang-yong indicated that it is reasonable to suppress core inflation by maintaining a tight policy stance. He stated that both cost-side and demand-side factors are contributing to rising inflation pressures, adding that the timing and magnitude of rate hikes will depend on data and economic conditions.
The central bank explained that the decision to raise rates earlier this month was driven by the expectation that inflation would remain above target for an extended period amid an economic recovery, while risks related to financial stability persist. The BOK expects the Korean economy to continue its solid growth, supported by robust exports and investment. The economy grew by 0.6% quarter-on-quarter in the second quarter, surpassing the BOK's May forecast of 0.2%, largely due to strong exports, with year-on-year growth approaching 3%.
The BOK also stated that as the chip industry boom strengthens, income effects and investment will increase, consequently raising inflationary pressures. Amid uncertainties in international oil prices, prices for services and industrial goods are expected to accelerate, and inflation will continue to exceed the target level. Regarding the local stock market, the BOK indicated that downside risks will be limited, supported by strong performance from major chipmakers such as Samsung Electronics. The Korean stock market has experienced volatility due to concerns about whether chip demand can sustain its expected strength, with the benchmark index falling nearly 30% this month alone.
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