"Monetary Policy Options Are Becoming Increasingly Limited" - Insights from the May MPC Minutes

"Inflation Concerns" Shared by MPC Members
Oil Price Shocks Expected to Gradually Push Inflation Higher
Upward Revision of Inflation Expectations Could Further Widen Price Increases
Demand Pressures Seen as Larger Than Previously Anticipated
Majority: "Need to Monitor Changes in External Environment Further"
Minority of Two Members: "Preemptive Rate Hike Needed"

The Monetary Policy Committee (MPC) of the Bank of Korea decided to keep the base interest rate unchanged at 2.50% per annum for the eighth consecutive time on May 28, and it was revealed that the majority of the committee members expressed concerns about inflation.

Shin Hyun-song, Governor of the Bank of Korea, is attending the first Monetary Policy Committee plenary meeting since his inauguration, held on the 28th of last month at the Bank of Korea headquarters in Jung-gu, Seoul. Photo by Joint Press Corps

According to the minutes of the May MPC meeting released by the Bank of Korea on June 16, several members stated that, taking into account both domestic and international financial and economic conditions, it would be appropriate to maintain the base rate at the current level of 2.50% until the next monetary policy decision. While they agreed that inflation risks have increased following the Middle East war, they also noted significant uncertainty over the future course of the conflict and the spillover effects of any oil price shocks. Therefore, they emphasized the need to monitor changing conditions while keeping the base rate steady.

One member pointed out, "With the continuation of high oil prices due to the Middle East war, inflation is expected to significantly exceed previous forecasts for our economy." He noted, "If oil price shocks spread to other items, the inflation rate is likely to rise further," and also warned that the upward adjustment in overall economic agents' inflation expectations could widen the scope of price increases. He added, "Since there have been some recent signs of rising inflation expectations, we should pay close attention to related indicators."

Another member also stated, "Even if the Middle East war subsides, it will likely take considerable time to restore supply chains such as energy production facilities, and demand pressure is expected to be stronger than previously anticipated. Therefore, the upside risks are assessed to be greater than the downside risks."

The committee members shared the view that growth has been buoyed by robust semiconductor exports driven by a global expansion in artificial intelligence (AI) investment, which has increased upward pressure on the economy. One member cautioned, "While income growth resulting from improved exports will serve as a positive factor for domestic demand recovery, it could also further stimulate inflation." The analysis pointed out the need to monitor both the direct and indirect cost pressures from oil price shocks, as well as the transmission channels of demand-side inflationary pressures stemming from improvements in the real economy. Another member noted, "The domestic economy has rebounded sharply in the first quarter with the semiconductor upcycle, and export, investment, and consumption indicators have remained favorable in April and May. If this continues, the annual growth rate could significantly exceed the potential growth rate."

Another committee member cautioned that greater attention should be paid to the widening polarization across the economy. He said, "While certain sectors are booming, difficulties are growing for non-semiconductor industries and small businesses due to raw material supply issues. As a result, polarization in both the real sector and financial markets is intensifying, raising concerns about balanced development." He argued that now is the time to seriously contemplate both the growing economic polarization and the downward trend in potential growth rates noted by the Organisation for Economic Co-operation and Development (OECD). He added, "It seems inevitable that the options for monetary policy will continue to narrow. With the high level of uncertainty stemming from the Middle East war, rather than making a hasty adjustment to the base rate, it is preferable to monitor changes in the external environment more closely," expressing support for maintaining the current rate.

In contrast, two committee members (Yoo Sangdae and Jang Yongseong) argued that the base rate should be raised from the current 2.50% to 2.75%. They emphasized the need for a preemptive response to inflationary pressures. One member stated, "While government measures have curbed the extent of price increases, such policies cannot be sustained over an extended period and only temporarily defer upward pressure. The underlying causes of inflation are not being resolved. In fact, actual inflationary pressure is greater than what is reflected in official indicators," and added, "The recent rise in market interest rates is largely reflecting heightened inflation expectations."

He argued that using excess tax revenue derived from robust exports to selectively support vulnerable groups left out of growth, as well as partially using it to repay national debt, would not only ease the burden on future generations but also help alleviate upward pressure on market interest rates. He also pointed out, "We must not forget that low-income groups are the most vulnerable to inflation."

Another member expressed concern that widespread demands for wage increases across the economy could further heighten upward pressures on prices, adding that as demand-side inflationary pressure expands, there is a possibility of a second-round effect transmitted through expectations and wages, and thus supported a preemptive rate hike.

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