The Bank of Korea held the first meeting of the Bank of Korea's monetary policy committee since Shin Hyun-song took office on the 28th and kept the base rate unchanged at 2.5% a year, while signaling the possibility of a rate hike ahead.
Of the seven members of the Monetary Policy Board, Vice Governor Yoo Sang-dae of the Bank of Korea and Commissioner Jang Yong-sung offered a minority view that it would be desirable to raise the rate to 2.75%. The policy statement on the direction of monetary policy also newly included the phrase, "We will decide the timing of a rate hike going forward."
On this day, the Monetary Policy Board kept the rate at 2.5% a year for the eighth consecutive time. In the statement on the direction of monetary policy, the Bank of Korea (BOK) said, "While inflationary pressure has increased due to the Middle East war, growth is expanding more than expected on the back of strong exports," adding, "Given the high uncertainty related to the evolution of the Middle East situation and its spillover effects, it is appropriate to maintain the current rate level."
◇ This year's consumer price inflation seen at 2.7%… rising price concerns
The Monetary Policy Board cited inflation as one reason for holding the rate. In the policy statement on the direction of monetary policy released that day, the board said, "This year's consumer price and core inflation are expected to be 2.7% and 2.4%, respectively, far exceeding the projections in February," adding, "Uncertainty remains high regarding factors such as global oil prices, the exchange rate, and the effects of the government's price stabilization measures."
Consumer prices rose 2.6% in April, the largest increase in 1 year and 9 months since July 2024 (2.6%). Producer prices in April also rose 2.5% from the previous month, the highest since February 1998 (2.5%) during the foreign exchange crisis. Producer prices are reflected in consumer prices with a lag.
Volatility in the financial and foreign exchange markets also influenced the decision to hold the rate. Concerns about inflation have driven a sharp rise in government bond yields, and the won-dollar exchange rate against the U.S. dollar is hovering around 1,500 won. As Governor Shin analyzed that the rise in the won-dollar rate stems from the interest rate gap between Korea and the United States, a rate cut was deemed difficult. The U.S. Central Bank policy rate is 3.75%, 1.25 percentage points higher than Korea's.
◇ Policy statement says "we will decide the timing of a rate hike"
At this meeting, the Monetary Policy Board left open the possibility of shifting the direction of monetary policy toward a rate hike. The last hike was in January 2023, when the rate was raised from 3.0% to 3.5%.
The Bank of Korea (BOK) policy statement on the direction of monetary policy said, "Going forward, monetary policy will determine the timing of a base rate hike while reviewing the extent of rising inflationary pressure, the trajectory of economic improvement, and financial stability conditions." The intent is to review the timing rather than whether to raise rates. The April policy statement did not mention a rate hike.
There were also minority views within the Monetary Policy Board that a rate hike is necessary. A minority opinion favoring a hike is the first in about four years since former board member Cho Yoon-je in February 2023. The previous meeting decided unanimously to hold the rate. As prices rise while economic growth appears strong, it is interpreted as a judgment that a rate hike would be feasible. Real gross domestic product (GDP) in the first quarter increased 1.7% from the previous quarter. It was a record high in 5 years and 6 months since the third quarter of 2020 (2.2%).
The "dot plot," in which board members mark with dots the interest rate level they expect in six months, also showed the possibility of a policy shift toward hikes. Each member places three dots on the dot plot. Back in February, only one of the 21 dots was placed at 2.75%, suggesting board members saw a low likelihood of future hikes.
This time, however, 19 out of 21 dots were placed in the 2.75%–3.25% range. Opinions favoring at least one to two or three rate hikes ahead became dominant within the Monetary Policy Board. Ten dots were placed at the level of two hikes (3.0%), seven at one hike (2.75%), and two at three hikes.
Bank of Korea (BOK) Vice Governor Yoo Sang-dae said on the 3rd, "It is time to stop cutting the base rate and consider raising rates." Earlier, a survey by ChosunBiz of 10 macro and bond experts at domestic securities firms found that all expected one rate hike in the third quarter of this year.