Shin Hyun-song: "Base Rate at Midpoint of Neutral Range... Comprehensive Consideration Needed for Price, Financial Stability, and Economic Conditions"

The Bank of Korea Has Also Estimated 2.5% as the Midpoint of the Neutral Rate Range

Shin's Stance Differs from Market Expectations That He Would See the Neutral Rate as Higher Due to Household Debt and Other Factors

Stresses the Need to Cons

HyunSong Shin, the nominee for Governor of the Bank of Korea, assessed the current base rate (2.5% per annum) as being around the midpoint of the estimated neutral interest rate range. He also emphasized that the base rate should be determined by comprehensively considering not only price stability, but also financial stability and the overall economic environment, including business conditions. Compared to market expectations that he would take a 'hawkish' (monetary tightening) stance, he presented a more dovish position.

HyunSong Shin, the nominee for Governor of the Bank of Korea, is responding to reporters' questions as he arrives at the confirmation hearing preparation office set up at Hanwha Financial Plaza in Jung-gu, Seoul on the 31st of last month.

On April 12, in response to a written inquiry from Assemblyman Chun Haram of the Reform New Party, a member of the National Assembly's Strategy and Finance Committee, Shin based his answer regarding Korea’s neutral interest rate on research conducted both within and outside the Bank of Korea. The neutral rate refers to the theoretical equilibrium rate at which economic activity is at its potential level, neither generating inflation nor creating deflationary pressure. The Bank of Korea has repeatedly stated that 2.5% is estimated to be around the midpoint of the neutral rate range.

In the market, there had been speculation that, given Shin's background at the Bank for International Settlements (BIS), he might view the neutral rate as relatively high, considering factors such as South Korea’s real estate prices and household debt. However, with this response, Shin demonstrated that he shares a similar perspective to the Bank of Korea’s existing position. In other words, he did not display a particularly hawkish tendency. Previously, the market had classified Shin as a 'rational hawk' based on his remarks emphasizing the need for financial stability and preemptive action against inflation.

Shin further stated, “Monetary policy should primarily focus on price stability, as stipulated in the Bank of Korea Act, but it should also be operated in a balanced manner by taking into account both financial stability and economic conditions. Since the financial and real sectors are closely linked, it is undesirable to mechanically prioritize only price stability. It is necessary to respond flexibly by comprehensively considering the overall economic flow, including business conditions and financial stability.”

Regarding the recent rise in the won-dollar exchange rate, Shin cited the surge in oil prices due to the war involving Iran and net selling of domestic stocks by foreign investors as the main reasons. He noted, “Korea’s high dependence on energy imports means that a rise in oil prices worsens our terms of trade. In addition, the relative outperformance of the Korean stock market had led global investors to rebalance their portfolios, resulting in significant net selling of domestic stocks by foreigners, which has added to upward pressure on the exchange rate.”

On the issue of the National Pension Service expanding its foreign exchange hedging, Shin expressed the view that this would help alleviate imbalances in the supply and demand of the foreign exchange market. He also took a positive stance on the approach of diversifying the fund’s sources for investment, such as by issuing foreign currency bonds, stating, “A reduction in foreign exchange demand in the domestic market can help relieve upward pressure on the exchange rate.” Shin added, “Since exchange rate volatility simultaneously affects both assets and liabilities in the same direction, there is a natural risk diversification effect, which is also a positive development.”

This content was produced with the assistance of AI translation services.