Bank of Korea Governor Shin Hyun-song: "Keep Policy Tight Until Inflation Cools; Inflation Hits Vulnerable Groups Hardest"

Conversation at IMF Annual Meetings

Bank of Korea Governor Shin Hyun-song said the central bank would maintain a restrictive monetary policy stance until it is confident that inflation will converge to its 2% target. He said the AI boom is supporting solid growth but, alongside the war in the Middle East, is worsening inflation. He also said that maintaining a restrictive stance to stabilize prices and strengthen the won would help ease polarization in the Korean economy.

Shin made the remarks on October 13 (local time) during a conversation with Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, at the annual meetings of the International Monetary Fund (IMF) and the World Bank (WB) in Bangkok, Thailand. The discussion was titled “The AI Boom, the War in the Middle East and the Challenges for Korean Monetary Policy.”

Shin said the Korean economy is currently at the intersection of two major forces: the “AI boom” and the “war in the Middle East.” “The positive effects of the AI boom far outweigh the negative impact of the war in the Middle East, sustaining solid growth of 3.3%. But when it comes to prices, the combined effect of the two factors has actually worsened inflation,” he said.

“There are cost-push pressures from high oil prices, but demand-pull pressures from the semiconductor boom are also at play,” Shin said, predicting that “inflation will remain above the Bank of Korea’s target for the time being.” He added, “We will maintain a restrictive monetary policy stance until we are confident that inflation will converge to the target at an appropriate time.” His remarks reaffirmed the central bank’s restrictive stance, which began with a rate hike in July.

Shin stressed that all three of Korea’s current policy challenges—price stability, the exchange rate and financial stability—support a restrictive monetary policy. “Trade-offs in policymaking are the norm, not the exception. But in Korea’s current situation, all three point in the same direction, making the policy course quite clear,” he said. “It is difficult to chase two rabbits running in different directions, but if they are both running in the same direction, policy decisions become much easier.”

Shin said that while the AI boom has positive effects, including raising the neutral interest rate over the long term, driving a surge in AI infrastructure investment and increasing tax revenue, its benefits are concentrated among major IT companies, resulting in a “K-shaped economy.” “Companies in the IT sector have reaped substantial benefits from the boom, but there are very broad swaths of industry that have not. The disparities are considerable both across regions and across industries, and a K-shaped pattern is emerging across the economy as a whole,” he said.

“The bottom 20% of households by income in Korea spend 32% of their income on food and energy, making them the most vulnerable to inflation,” he said. “Stabilizing prices is the most effective way to help vulnerable groups.”

He also gave a positive assessment of the won’s recent appreciation. Saying that the won had strengthened clearly since monetary policy shifted to a restrictive stance, he added that there was still room for further appreciation. “When the exchange rate falls, it boosts households’ real purchasing power and helps balance the export sector with domestic demand,” Shin said. “Further appreciation of the won is desirable, both to ease K-shaped polarization and to support financial stability.” 

To ease the burden on vulnerable borrowers from high interest rates, Shin called for the use of fiscal policy as well as targeted debt restructuring. “We need to mobilize fiscal resources to mitigate the most severe impacts,” he said, adding that “there may also be room to adjust debt obligations if necessary.” However, he added, “We need to strike a balance between moral hazard and reducing the economic constraints caused by the burden of past debt.”

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