Bank of Korea Governor Shin Hyun-song, responding to market expectations for a "big step," said, "We will be especially careful not to be led by the market's flow." It is interpreted to mean there is no need to raise the benchmark rate by two steps (0.05 percentage point) at once in July.
Shin gave this answer when asked at a briefing to review the operation of the price stability target held at the Bank of Korea in Jung-gu, Seoul, about "what is the Bank of Korea's position on market expectations that rates could be raised a bit faster and by more." He added, "When the big-step talk emerged, bond yields were high and the exchange rate had risen a lot, creating a difficult situation."
Government bond yields and the won-dollar exchange rate, which had been soaring, are stabilizing after the U.S.-Iran cease-fire deal was reached. The three-year government bond yield, which reflects market expectations for the benchmark rate, spiked to 4% intraday on the 10th, then reversed lower and finished the day at 3.7%. The won-dollar exchange rate, which moved around 1,550 won last week, also fell to about 1,510 won.
So far, the Bank of Korea has taken a big step only twice, in July and October 2022. The consumer price inflation rate rose to 3.7% in Dec. 2021 and then, with the outbreak of the war in Ukraine, surged to 6.3% in July 2022. At the time, major economies were tightening the money supply, with the Federal Reserve (Fed) raising rates by 0.5 percentage point at once for the first time in 22 years.
Meanwhile, Shin assessed that wage increases could push prices higher. When IT corporations pay performance bonuses, wage growth in other industries also rises. As wages go up, consumer demand expands, increasing the likelihood of higher prices. Shin said, "There is concern that wage growth could raise upward pressure on prices from both the expense and demand sides," adding, "Compared with the May monetary policy meeting, we judge that wage demand seems stronger than expected."
Shin showed a somewhat negative reaction to the view that increased tax revenue should be used to repay national debt. Shin said, "Korea is fiscally solid compared with other countries," adding, "Because the fiscal situation is good, we can place higher priority on (other areas)." He went on, "Discussions on national projects that accompany tax benefits and the like are just beginning," adding, "In a way, this can be seen as a very good opportunity for the Korean economy to take a leap forward."