Bank of Korea Governor Shin Hyun-song said the reason for raising the base rate for a second straight time was that "a preemptive response can control inflation expectations," adding, "responding early before price increases spread further can ultimately reduce the expense to the economy." The Bank of Korea decided that day to raise the rate by 0.25 percentage point to 3%. It raised the rate in July by 0.25 percentage point and again in August.
Shin answered this way to a question asking him to explain the background of the consecutive rate hikes at a press conference after the the Bank of Korea's monetary policy committee meeting on the 27th. Shin said, "Raising the rate twice in a row was a step that slightly departed from convention," but added, "It sent that much of a strong signal to the market."
Shin said, "Most research finds that a preemptive currency policy response can stabilize inflation expectations faster than a delayed response and ease the burden on growth," adding, "There is an expression about blocking something with a small hoe instead of a big shovel; the Bank of Korea conducted currency policy with a small hoe."
As reasons for the rate hike, Shin cited not only prices but also the Seoul metropolitan area dwellings prices that are posting double-digit growth and household liability, which as of the end of June surpassed 2,000 trillion won. He said that while it is difficult to curb home prices with currency policy, there is an indirect easing effect.
Regarding the won-dollar exchange rate, which is in the 1,380-won range, Shin said, "I see it as fairly stable," but added, "Seen historically, it appears high." He went on, "Through an early response in currency policy, there is room for additional strengthening of the won," adding, "It is expected to offset the 19% rise in import prices and thus contribute to price stability."
Citing the median of the dot plot that shows the rate expected by Monetary Policy Board members in six months (next February) at 3.25%, Shin said, "Because there are four policy direction meetings left, we expect the pace to moderate to roughly one more rate hike." He added, "Because we raised rates for two straight meetings, we need to assess the effects, and given the early response, we expect it to be effective."
On criticism that the Bank of Korea's currency tightening policy is out of sync with the government's expansionary fiscal policy, he said, "If (through expansionary fiscal policy) the economic growth rate can be lifted, then it is not out of sync," adding, "It can even move in a direction that helps currency policy."