On the 28th, the Bank of Korea held the first meeting of the Monetary Policy Board since Governor Shin Hyun-song took office and kept the benchmark rate at 2.5% a year, while hinting at the possibility of a rate hike ahead.
Of the seven Commissioners, Yu Sang-dae, Bank of Korea (BOK) deputy governor, and Jang Yong-sung said it would be desirable to raise the rate to 2.75% in a minority opinion. The phrase "will decide the timing of a rate hike ahead" was also newly included in the statement on the direction of monetary policy.
In the statement on the direction of monetary policy, the Monetary Policy Board said, "While price pressures have increased due to the Middle East war, the growth trend is expanding more than expected, helped by strong exports," adding, "Given the high uncertainty related to the development of the Middle East situation and its spillover effects, it is appropriate to maintain the current rate level."
◇ Consumer price inflation seen at 2.7% this year… inflation concerns expand
The Monetary Policy Board cited rising prices as one reason for holding the rate. In the statement on the direction of monetary policy, it said, "This year's consumer price and core inflation rates are expected to be 2.7% and 2.4%, far exceeding the projections in Feb.," and added, "Uncertainty is judged to be high regarding factors such as international oil prices, the exchange rate, and the effects of the government's price stabilization measures."
The consumer price inflation rate in Apr. was 2.6%, marking the largest increase in 1 year and 9 months since Jul. 2024 (2.6%). Producer prices in Apr. also rose 2.5% from the previous month, the highest since Feb. 1998 (2.5%) during the foreign exchange crisis. Producer prices are reflected in consumer prices with a time lag.
Volatility in the financial and foreign exchange markets also influenced the rate hold. Concerns about inflation pushed government bond yields up sharply, and the won's exchange rate against the U.S. dollar (won-dollar rate) has been hovering around 1,500 won. As Governor Shin analyzed that the won-dollar rate's rise is due to the rate gap between Korea and the United States, the board judged that cutting rates would be difficult. The Central Bank's benchmark rate in the United States is 3.75%, 1.25 percentage points higher than Korea's.
◇ Statement says "will decide on timing of rate hikes"
At this meeting, the Monetary Policy Board left open the possibility of shifting the direction of monetary policy toward rate hikes. The last rate hike was in Jan. 2023, when the rate was raised from 3.0% to 3.5%.
The statement on the direction of monetary policy said, "Going forward, monetary policy will decide on the timing of a benchmark rate hike while checking the extent of intensifying inflationary pressures, the pace of economic improvement, and financial stability conditions." The intent is to review the timing, not whether to raise rates. There was no mention of a rate hike in the April statement on the direction of monetary policy.
There were also minority views within the Monetary Policy Board that a rate hike is necessary. A minority opinion for a rate hike is the first in about four years since former board member Cho Yoon-je in Feb. 2023. The previous board decided unanimously to hold the rate. It is interpreted as a judgment that, while prices are rising, the economic growth rate is strong enough that a rate hike would not be out of place. Real gross domestic product (GDP) in the first quarter rose 1.7% from the previous quarter. It was the record high in 5 years and 6 months since the third quarter of 2020 (2.2%).
The "dot plot," which marks with dots the rate level board members expect in six months, also showed the possibility of a policy shift toward hikes. Each board member places three dots on the dot plot. In Feb., only one of the 21 dots was placed at the 2.75% level, suggesting members saw a low likelihood of future rate increases.
This time, however, 19 of the 21 dots were placed in the 2.75%–3.25% range. Views have grown within the Monetary Policy Board that there is a possibility of at least one to two or three rate hikes ahead. Ten dots were placed at the level of two hikes (3.0%), seven at one hike (2.75%), and two at three hikes.
Yu Sang-dae, Bank of Korea (BOK) deputy governor, said on the 3rd, "It is time to stop cutting the benchmark rate and consider raising it." Earlier, a survey by ChosunBiz of 10 domestic securities macro and bond experts found that all expected one rate hike in the third quarter of this year.