July rate hike was no one-off, BOK deputy governor says

The Bank of Korea should keep raising interest rates after its first hike in more than three years, as strong growth and persistent inflation outweigh recent stabilization in the won and stock market, a senior central bank official said Tuesday.

“Looking ahead, growth is expected to remain solid on the back of unprecedented income growth, while underlying inflationary pressures persist and financial stability risks could increase,” BOK Senior Deputy Gov. Ryoo Sang-dai said at a press conference held at the central bank’s headquarters in Seoul.

Though Ryoo will not participate in the next rate-setting meeting scheduled for Aug. 27 as his term ends on Aug. 20, he emphasized, “There is a need to maintain the rate-hike stance.”

The BOK lifted the rate in July by 0.25 percentage point to 2.75 percent, ending a pause in monetary policy that had persisted for more than a year. It was the first time the central bank had lifted the key rate since January 2023.

Ryoo stressed that the lift was not a one-off move: “As the economy moves in cycles, the policy rate does as well. While the pace and magnitude of rate hikes are influenced by a complex range of factors, it is definite that the hike in July is a part of a cycle.”

Following July’s rate-setting meeting, economic data has remained solid. The country’s real gross domestic product rose 0.6 percent in the April-June period from three months earlier, continuing the robust 1.8 percent expansion from the previous quarter. Consumer prices rose 2.8 percent in July. Although inflation eased slightly from the previous months, it remained well above the central bank’s 2 percent target.

“Absent any major shock or unexpected factor, further rate hikes are likely,” Ryoo said, highlighting monetary policy as inherently “preemptive.”

While the Korean won has recently strengthened against the greenback, moving into the low 1,400-won-per-dollar range, and the stock market’s recent rally has lost momentum, neither development is a decisive factor in monetary policy, Ryoo said.

“The exchange rate has stabilized somewhat, while volatility in the stock market has decreased, giving monetary policymakers some room to wait and assess,” Ryoo said.

“Traditionally, however, neither factor has carried much weight in monetary policy decisions. Greater weight is placed on whether underlying inflation will remain elevated and whether economic growth will continue.”

Ryoo highlighted the current rate-hike cycle as markedly different from those of the past.

“Improved terms of trade have been accompanied by unprecedented growth in nominal GDP and an increase in the current account surplus,” he said.

Korea’s nominal GDP rose 10.5 percent in the first quarter of this year from the previous quarter and 17.1 percent from a year earlier. The quarter-on-quarter increase marked the first time the figure had risen by more than 10 percent since 1976.

The current account surplus reached $191 billion in the first six months of this year, equivalent to 1.6 times the $123.1 billion recorded for the whole of last year.

When changes in the terms of trade were driven by export prices, consumption increased significantly more than when they were driven by import prices, he said.

“Going forward, growth is expected to remain solid on the back of unprecedented income growth, while underlying inflationary pressures are likely to persist and financial stability risks could increase,” he said.