[Q&A] Shin Hyun-song: "Back-to-back Rate Hikes Are a Nimble Response to Rising Costs"

Bank of Korea's August Monetary Policy Press Conference

"Preemptive Rate Hikes Will Reduce Economic Costs"

"Financial Vulnerability Index Rising Sharply"

"Gradual Rate Increases Expected Over the Next Six Months"

Shin Hyun-song, Governor of the Bank of Korea, commented on the two consecutive 0.25 percentage point increases in the base interest rate by stating, "When action is delayed, the costs become that much greater. This time, we have addressed the issue with a nimble policy response."

At the press conference on the Monetary Policy Direction following the Monetary Policy Committee’s decision on August 27th to raise the base rate to 3.00% per annum, Governor Shin remarked, "There is a saying that what can be blocked with a hoe ends up needing a shovel if not dealt with early." He used this analogy to explain the decision.

This implies that the latest base rate hike is a timely move to address inflation pressures early. Governor Shin emphasized, "A preemptive response means controlling inflation expectations and taking early action before upward price momentum spreads further, ultimately reducing the costs to the economy."

Regarding the future path of the base rate, he anticipated a gradual pace of increases. Referring to the newly released dot plot on the same day, Governor Shin said, "On a six-month horizon, 3.25% appeared as the median value. With four more meetings of the Monetary Policy Committee scheduled over the next six months, the median implies roughly one more hike, so I expect a gradual pace of increases."

The following is a Q&A transcript.

Shin Hyun-song, Governor of the Bank of Korea, is attending the Monetary Policy Committee plenary session held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 27th, tapping the gavel. 2026.08.27. Photo by the Joint Press Corps

-There was a minority opinion in the rate decision. What concerns about rate hikes were raised during the discussions? Additionally, with the consecutive rate hikes, the dot plot and the economic growth forecast have both risen significantly—could you clarify what each means?

▲Governor Shin = The most important factor was our assessment of the ongoing inflation trend. Income conditions have improved and robust growth is now expected to continue through next year. In this context, we became increasingly concerned that upward price momentum could intensify and remain elevated for a prolonged period. As a result, this year’s growth forecast has been sharply revised upward to 3.3% and next year’s to 2.9%, a significant increase from the May forecast. To explain why we pay close attention to core inflation: we need to be mindful of fundamental demand pressures, and core inflation is the best indicator for underlying price movements. By excluding volatile items such as energy and food prices, core inflation captures these fundamental trends. We have also revised our core inflation outlook upward compared to May; we now project 2.5% for both this year and next. These figures reflect the sustained upward pressures on inflation resulting from improved income conditions and continued economic strength. On raising the base rate consecutively following July, I would say that a proactive response is crucial. Being proactive means controlling inflation expectations and responding early, before inflationary trends deepen, so that we can ultimately reduce costs to the economy. There is ample research showing that preemptive, early intervention helps minimize the economic costs of inflation. During my time at the Bank for International Settlements (BIS), I participated in several such studies. Early action helps prevent the costs associated with delayed responses. The expression about blocking something with a hoe rather than a shovel applies here—we chose a nimble and timely policy approach on this occasion.

-There are concerns about the interest burden for vulnerable borrowers due to the rate increases.

▲Governor Shin = Of course, the rate hike has raised concerns for vulnerable borrowers. We are always mindful of this, and it was given considerable attention in our discussions. The government and the Bank of Korea are maintaining close communication on this matter. As you may have seen, the government’s economic growth plan for the second half of the year includes support measures for vulnerable borrowers. We will continue to coordinate with the government to help reduce overall costs by responding preemptively. For small and medium-sized enterprises facing particularly tight funding situations, our Bank Intermediated Lending Support Program has proven valuable. The rate for this program was kept unchanged at 1.25%.

-How do you assess the impact on long-term interest rates and the exchange rate following the rate hike?

▲Governor Shin = Discussions of long-term rates and currency movements are prominent in major countries right now. If monetary policy falls behind the curve, it becomes harder to respond and there is more potential for negative market reactions. In Korea, the won has achieved some stability. Before coming in today, the won-dollar exchange rate was in the upper 1,370 won range. The analogy of a hoe versus a shovel also applies to managing the market: preemptive and early measures allow monetary policy to anchor the market and stabilize the foreign exchange market, thereby contributing to exchange rate stability. Although the won is much more stable now, it still remains at a high level compared to previous years. I believe there is room for further strengthening of the won through early, proactive monetary policy. If that happens, it could help offset the current 19% increase in import prices and contribute to price stability. The Bank of Korea intends to continue nimble management of the foreign exchange market.

-How do you assess the current exchange rate level and the recent rapid decline in the won?

▲Governor Shin = Compared to the end of June, the exchange rate has become much more stable. More important than a specific level, however, is predictability. Companies and households need to operate within a predictable range for proper planning and investment. Historically, the exchange rate remains at a high level and, considering import prices, a slightly stronger won would be preferable to curb inflation.

-There was a minority view. What were the points of disagreement?

▲Governor Shin = Board Member Hwang Gun-il expressed a minority view, but this was a tactical difference within a broad consensus. Everyone agreed on the big picture, but there were slight differences on the optimal tactical approach after a thorough discussion. So, the minority opinion should be viewed in this context. In the market, the debate was whether the hike would come in August or October. By acting early, we aimed to minimize costs. I also observed that the exchange rate stabilized somewhat before I entered, and despite two consecutive hikes, government bond yields declined slightly. In that sense, the market responded positively to the Bank of Korea’s actions.

-Despite government regulations, house prices in the Seoul metropolitan area remain elevated, and leverage-driven investments are widespread. Compared to the previous month’s policy meeting, what additional financial stability considerations have you taken into account?

▲Governor Shin = We have always highlighted the importance of financial stability, as I mentioned during the past two policy direction press conferences. We continue to monitor the situation closely. The house price growth rate in the capital area remains in the double digits, and we factored its potential impact on financial markets and stability into our decision. The reason we emphasize financial stability is Korea’s painful experience with financial crises—specifically the 1997 foreign exchange crisis. The Financial Vulnerability Index (FVI), which we publish in the Financial Stability Report, uses standardized indicators such as asset prices, credit, and leverage of financial institutions. The reference value of 100 is set at the pre-crisis level in Q2 1997; currently it stands at around 46.5. When the new Financial Stability Report is released in September, new figures will be available. For reference, the FVI prior to the global financial crisis was around 79.5, and just before the Legoland incident in 2022, it was slightly above 65. Ideally, maintaining a low FVI is desirable. After the Legoland incident, deleveraging occurred and real estate issues were largely resolved, pulling the FVI down to 37.6 in Q1 2024. Since then, however, it has climbed sharply and will likely exceed the long-term average in the September report—this is a significant concern for us. A higher FVI means greater potential for financial stress and a greater impact on the real economy. This concern particularly affects vulnerable groups. While rate hikes are not a cure-all, there is a general pattern where higher rates bring down the vulnerability index. As I have previously mentioned, monetary policy and macroprudential policy complement each other. For macroprudential policy to work, monetary policy needs to contribute to appropriate financial conditions, and vice versa. Thus, monetary policy and macroprudential policy act as mutual catalysts. Since this synergy is key to effective policy, financial stability cannot be guaranteed by the Bank of Korea alone. We will continue to work with financial authorities and pursue balanced policies to ensure stability.

-The dot plot points to the possibility of another rate hike in Q4. What will be the key factors for future monetary policy?

▲Governor Shin = According to the dot plot, the six-month median is at 3.25%. There are four more Monetary Policy Committee meetings during this time. Given the median projection implies one more hike, we expect a gradual trajectory. Having implemented two consecutive increases, it is important for us to assess their effects. Our preemptive approach should already contribute to stability. With additional scope for the exchange rate to strengthen, as mentioned earlier, a stronger won would help contain import prices and support efforts to curb inflation.

-Does this mean only one more rate hike is likely in the remaining meetings?

▲Governor Shin = All upcoming meetings are "live"—that is, each meeting’s decision will depend on evolving economic and financial conditions. Two consecutive hikes were highly unusual by historical standards and signaled a strong commitment. There is a consensus that we need to monitor how these policy moves affect the economy and financial markets.

-While the Bank of Korea has raised interest rates consecutively, the government intends to pursue an expansionary fiscal policy next year with a budget of over 800 trillion won. Isn’t this a policy mismatch?

▲Governor Shin = In the second quarter, Gross Domestic Income (GDI) grew by 15.6%—a truly unprecedented figure. Government accounts also contributed to this rapid income growth. Strong tax revenues have benefited from these improved income conditions, meaning the fiscal position has strengthened. The preliminary national income figures will be released in early September, including nominal Gross Domestic Product (GDP). Given GDI and nominal GDP growth, key indicators such as debt ratios should show marked improvement since nominal GDP is the denominator. If fiscal spending is directed toward investments that strengthen future growth potential, it could boost the potential growth rate and may not be a policy mismatch. The details—in terms of size, allocation, and pace of spending—will need to be reviewed. The key principle is whether spending can enhance the long-term growth rate; if so, there is no mismatch.

-With the semiconductor boom, what is your view on when, how strongly, and through which channels demand-driven inflationary pressures might emerge?

▲Governor Shin = Income growth is not limited to select industries, but indicates a broad increase in national income. For government finances, increased tax revenue is quickly realized, while household income gains may emerge through bonuses and wage increases. Capital investment and other balanced effects will also channel gains into consumption through a variety of routes.

-Was the significant upward revision in the growth forecast based on an assumption of a structurally higher neutral interest rate?

▲Governor Shin = We are currently reviewing all concepts related to potential growth and the neutral rate internally. In brief, I previously noted that the GDP gap will turn positive next year, but we now expect this to occur sooner and believe we are already near the critical threshold. However, a higher growth outlook alone does not necessarily mean there has been a structural increase in the potential growth rate or the neutral rate. We will provide further analysis and explanations on this at a later date.

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