Bank of Korea Governor Signals Further Rate Hikes to Counter Inflation

Bank of Korea Governor Rhee Chang-yong reiterated on Friday the necessity of raising the benchmark interest rate at the upcoming monetary policy meeting to alleviate inflationary pressures, which are being exacerbated by the ongoing Middle East conflict.

In a speech marking the central bank's 76th anniversary, Rhee stated that while monetary policy inevitably involves trade-offs between different objectives, the current trade-off is not severe. He emphasized that price stability must be prioritized, and interest rates should be increased without delay.

Rhee noted that the Korean economy is maintaining robust growth, with a first-quarter expansion of 1.8%, supported by strong semiconductor exports.

However, inflation concerns have intensified as the Middle East conflict persists. South Korea's consumer price index rose by more than 3% year-on-year in May, marking the fastest pace of increase in 26 months.

The core inflation rate, which excludes volatile food and energy prices, also increased by 2.5% last month.

He added that the weakening Korean won, influenced by substantial selling by foreign investors, is expected to drive up import prices, thereby adding to inflationary pressures.

Rhee also pointed out that financial risks are threatening stability, with recent data showing a significant rise in household loans last month, primarily driven by increased stock investment-related borrowing amid a rising stock market.

Given the current conditions of economic growth, inflation, and financial stability, Rhee stated that the direction for monetary policy is relatively clear.

These remarks come as the Bank of Korea has recently signaled a clear intent to tighten monetary policy in the coming months.

At its latest rate-setting meeting last month, the central bank held its benchmark rate steady but indicated it would determine the timing of future hikes based on inflation trends, as semiconductor exports continue to underpin economic growth.

The Bank of Korea's next monetary policy meeting is scheduled for July 16th.