‘Inflation Likely to Remain Above Target for Considerable Period,’ Shin Says in BOK Anniversary Speech
Bank of Korea (BOK) Governor Shin Hyun-song strongly reiterated the necessity of raising interest rates, citing persistent inflationary pressures stemming from the Middle East conflict and escalating housing prices in South Korea.
During the BOK’s 76th-anniversary ceremony in Seoul, Governor Shin highlighted that key indicators for economic growth, inflation, and financial stability collectively signal the imperative for further policy tightening.
“Data received since the May monetary policy meeting have unequivocally confirmed this assessment,” he stated. “While monetary policy often involves trade-offs among various policy objectives, such tensions are currently limited, allowing for decisive action.”
“Therefore, it is crucial to prioritize price stability and proceed with interest rate hikes without delay,” he asserted.
Addressing the ongoing challenge of inflation, Shin explained that prices of frequently purchased goods and services – which significantly influence households’ inflation expectations – are accelerating at a faster pace than headline consumer prices.
He warned that inflation is likely to remain above the central bank’s official inflation target for a considerable period, despite government measures aimed at stabilizing prices potentially offering some relief from upward pressure.
“The burden of inflation disproportionately affects low-income households, making preemptive efforts to stabilize prices even more critical,” Shin emphasized.
Acknowledging valid concerns that elevated interest rates could increase debt-servicing costs for both households and businesses, Shin suggested that targeted support delivered through fiscal policy would be a more effective strategy to mitigate such financial difficulties.
Governor Shin also issued a stern warning regarding potential overheating in the nation’s housing market.
“Across the Seoul metropolitan area, home prices, alongside jeonse deposits and monthly rents, continue their sharp ascent, concurrently strengthening expectations for further gains,” he observed.
He called for sustained efforts to decentralize people and resources away from the capital region, advocating for policies that encourage capital flows into more productive economic sectors.
Furthermore, Shin cautioned against excessive borrowing for stock market investments, highlighting that high leverage could significantly amplify market volatility and lead to substantial losses should prices undergo correction.
Regarding the foreign exchange market, Shin expressed expectations for the Korean won to gradually stabilize. This anticipated stability is attributed to South Korea’s substantial current account surplus, which boosts demand for the local currency through corporate tax payments and increased domestic investment.
However, he cautioned that persistent volatility in the won-dollar exchange rate, influenced by global factors such as developments in the Middle East, could exacerbate inflationary pressure by driving up import prices.
Shin affirmed that the Bank of Korea would collaborate closely with relevant authorities to enhance foreign investors’ access to the won market. Proposed measures include implementing 24-hour trading and developing an offshore won settlement system. The ultimate goal, he added, is to channel offshore nondeliverable forward trading demand into the domestic market.
On the broader South Korean economy, Shin projected continued solid growth, buoyed by an ongoing semiconductor boom and a recovering domestic demand, supported by rising incomes and stronger investment.
He prudently cautioned, however, that this economic growth remains heavily reliant on the information technology sector, and significant disparities across various industries persist.
“We must continue our dedicated efforts to reduce disparities across regions, generations, and income groups to foster inclusive growth,” he urged.
Shin underscored the importance of expanding strategic investment to bolster the country’s future growth potential, advocating for this to be supported by a stronger fiscal capacity and improved corporate finances.
Quoting the adage, “repair the roof while the sun is shining,” Governor Shin concluded that this is no time for complacency, especially as the global economic environment undergoes rapid transformation driven by advancements in artificial intelligence technologies.
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