Shin Hyun-song, nominee for governor of the Bank of Korea, on the 12th said the current benchmark interest rate of 2.5% a year is the middle level of the estimated range for the neutral rate.
Shin answered this based on "research results inside and outside the Bank of Korea (BOK) regarding Korea's neutral rate" in response to a written inquiry from Reform Party lawmaker Cheon Ha-ram of the National Assembly's Planning and Finance Committee.
In general, the neutral rate refers to the theoretical interest rate level that allows the economy to return to its potential growth rate without inflation or deflation pressures.
Previously, the market suggested Shin could view the neutral rate relatively high, considering Korea's real estate and household debt conditions.
However, as Shin judged the current benchmark rate to be at the "middle" of the estimated neutral range, the possibility increased that the existing monetary policy stance will be maintained. Inside and outside the Bank of Korea (BOK), the neutral rate has been estimated at around 2% to 3%.
There is also a view that even if the benchmark rate is raised to respond to future prices, the increase could be carried out two or three times by 0.5 to 0.75 percentage points each.
However, Shin noted, "The neutral rate has high uncertainty, as analysis results vary greatly depending on the estimation model, method, and time horizon," adding, "When assessing the monetary policy stance, it is necessary to consider not only the neutral rate but also overall financial conditions and policy effects in a comprehensive manner."
Meanwhile, Shin pointed to "external factors such as the surge in oil prices due to heightened tensions in the Middle East and global risk-off sentiment" as the reason behind the recent rise in the won-dollar exchange rate.
She added, "Korea has a high dependence on energy imports, so terms of trade deteriorate when oil prices rise," and saw that "an expansion of net selling by foreigners due to global investors' adjustments to their domestic stock allocations also increased upward pressure on the exchange rate."