Bank of Korea Governor Shin Hyun-song said on the 12th that "there is a need to raise rates without delay, with a focus on price stability." In the market, people are saying "the Bank of Korea has turned on the blinker to change lanes toward a base rate hike." It means the odds have risen that at the July Monetary Policy Board meeting, the base rate will be raised to 2.75%, up 0.25 percentage point from the current 2.5% a year.
At the 72nd anniversary ceremony held at the Bank of Korea in Seoul that day, Shin said, "Monetary policy inevitably faces trade-offs among policy variables, but the trade-offs are not large now," adding, "There is a need to raise rates without delay." Two weeks ago, at the Monetary Policy Board press conference, Shin said, "It is necessary to raise rates at an appropriate time." The phrasing on the timing of a rate hike changed from "at an appropriate time" to "without delay." The market sees this as raising the likelihood of a decision to raise rates at an early date.
◇ Inflation rises in the 3% range as the Middle East war drags on
Shin said a swift rate hike is needed because of prices. Shin diagnosed, "As the Middle East war has continued for more than three months, concerns about rising prices have grown further," and "There is also a latent concern that elevated household inflation expectations and the possibility of price hikes by corporations could act as additional inflationary pressures."
According to the Ministry of Data and Statistics (MODS), the consumer price index in May rose 3.1% from a year earlier. It is the largest increase in 2 years and 2 months since March 2024 (3.1%). Core inflation, which excludes food and energy with large price swings, was tallied up 2.5%.
Shin emphasized that strong semiconductor exports mean there is no big obstacle to raising rates. While the debt repayment burden on low-income and vulnerable groups will grow, he noted that this is an issue to be addressed by fiscal policy. The judgment that the won-dollar exchange rate needs to be calmed is also seen as adding momentum to a swift rate hike. Shin has explained that the rise in the won-dollar exchange rate is due to the interest rate gap between Korea and the United States.
Shin said, "The domestic economy will continue a solid growth trend as the semiconductor cycle remains strong, while domestic demand also recovers on the back of increased tax revenue from growth in nominal gross domestic product (GDP), improved income, and expanded investment," adding, "The growth, prices, and financial stability situation is pointing relatively clearly in one direction from a monetary policy perspective."
Real gross domestic product (GDP) in the first quarter rose 1.8% from the previous quarter. Nominal GDP, excluding price effects, increased 10.5%. It hit a record high since the first quarter of 1976 (13%).
◇ ECB fires a signal flare for rate hikes... Japan and the United States also seen raising
Major countries are also moving to raise rates to tame inflation. The European Central Bank (ECB) on the 11th (local time) raised the deposit rate to 2.25% from 2% a year. It was the first hike in 2 years and 9 months, and the first among the Group of Seven (G7) after the U.S.-Iran war broke out. The European Central Bank explained the reason for the hike, saying, "The Middle East war is causing inflationary pressures."
Japan is also likely to raise rates on the 16th. That is not only because of rising prices but also because the yen is weakening. Bank of Japan Governor Kazuo Ueda said on the 3rd, "If we judge that inflation risks are high, we need to discuss whether a rate hike is appropriate."
Japan could raise rates from 0.75% to 1%. Japan last recorded a rate in the 1% range about 31 years ago, in 1995.
The U.S. Federal Reserve (Fed) is likely to hold rates at the Federal Open Market Committee (FOMC) meeting to be held on the 18th, Korea time. But the market expects a signal for a rate hike to emerge at this meeting. Given recent prices, it cannot hold out without raising rates. The U.S. consumer price index for May rose 4.2% from a year earlier, marking a record high in 3 years and 1 month. Within the FOMC, there has been an opinion that if the inflation rate exceeds 2%, a rate hike is appropriate.
If the Bank of Korea raises rates in July, some analysts say the magnitude of future hikes could also grow. Experts had projected two to three times within the year, but four hikes have recently been mentioned. The three-year Treasury yield, which reflects market sentiment on rates, stood at 3.8% that day, a 1.3 percentage point gap with the base rate (2.5%).
Looking at the dot plot for May, in which Monetary Policy Board members marked with dots the expected rate level in six months, 10 were placed at two hikes (3%). Seven were at one hike (2.75%), and two were at three hikes. Opinions have shifted toward at least one to two or three hikes being needed.