Shin Hyunsong Shows His Hawkish Side... "Tight Policy Until Inflation Is Tamed" (Roundup)

Tight Policy Stance Reaffirmed at IMF Annual Meetings
AI Boom and Middle East War Add to Inflationary Pressures
Price Stability Is an Effective Way to Help Vulnerable Groups
Further Won Appreciation Desirable... Could Ease Imbalances Between Dome

"We will maintain a tight monetary policy stance until we are confident that inflation will converge to the target level of 2.0%."

Bank of Korea Governor Shin Hyun-song reaffirmed his commitment to maintaining a tight policy stance, saying inflationary pressures are mounting amid the artificial intelligence (AI) boom and the war in the Middle East. After raising the benchmark interest rate in both July and August, the central bank has placed greater emphasis on price stability in its monetary policy. Shin also said further appreciation of the Korean won could help ease imbalances between domestic demand and exports.

Shin Hyun-song (right), governor of the Bank of Korea, speaks with Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, at the annual meetings of the International Monetary Fund (IMF) and World Bank Group (WBG) in Bangkok, Thailand, on the 13th (local time). IMF YouTube channel

Cost and demand pressures both fuel inflation... "Inflation will remain above the Bank of Korea's target for some time"

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 World Bank Group (WBG) 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 was facing the combined effects of two factors: the AI boom and the war in the Middle East. Citing this year's economic growth forecast of 3.3%, he said, "The positive effects of the AI boom far outweigh the negative effects of the war in the Middle East, allowing growth to remain robust at 3.3%. But in terms of prices, the combination of the two factors has in fact made inflation worse."

"There are cost-push pressures from high oil prices, as well as demand-pull pressures from the semiconductor boom," Shin said, predicting that "inflation will remain above the Bank of Korea's target for some time." He added, "We will maintain a tight monetary policy stance until we are confident that inflation will converge to the target level at an appropriate time."

AI boom boosts tax revenue, but fuels a "K-shaped economy"... "Price stability is an effective way to help vulnerable groups"

Shin said the AI boom had brought positive effects, including increased investment and tax revenue. However, he noted that its benefits were concentrated among large IT companies and others, widening disparities between industries and regions and creating a "K-shaped" divide.

"The Korean government has gained a fiscal benefit from a substantial increase in tax revenue, driven by greater investment in AI infrastructure and the resulting strength in exports," he said. "Tax revenue is projected to rise 40% next year compared with this year." The government's proposed 2027 national tax revenue budget is KRW 584.4 trillion, 40.7% higher than the KRW 415.4 trillion in the 2026 supplementary budget. However, after the government raised its forecast for this year's national tax revenue to KRW 478.6 trillion on September 30, the increase compared with the latest forecast is about 22%.

He noted, however, that the benefits of growth were not being distributed evenly across the economy. "Companies in the IT sector have enjoyed the boom's benefits, but there are very broad sectors of industry that have not," Shin said. "The disparities are substantial both across regions and across industries, and a K-shaped pattern is emerging across the economy."

Shin identified price stability as a key way monetary policy can protect vulnerable groups. "Households in the bottom 20% of the income distribution in Korea spend 32% of their income on food and energy, so they are the most affected by rising prices," he said. "Stabilizing prices is the most effective way to help vulnerable groups."

Inflation, the exchange rate and financial stability all support "tightening"... "Further appreciation of the won would be desirable"

Shin emphasized that all three policy challenges - price stability, the exchange rate and financial stability - support maintaining a tight monetary policy stance.

He gave a positive assessment of the won's recent appreciation. "A decline in the exchange rate increases households' real purchasing power and helps rebalance the external export sector and domestic demand," he said. "The appreciation of the won has shifted the balance somewhat toward the domestic economy and has also had a positive effect in easing the K-shaped economic conditions."

"Given this, there is room for further appreciation, and some additional appreciation would be desirable," he said, emphasizing that "the exchange rate situation also calls for tight monetary policy."

Shin acknowledged that high interest rates could increase debt repayment burdens for vulnerable borrowers and said fiscal policy would be needed to provide support. "There are things central banks can do, but they cannot do everything," he said. "Fiscal resources need to be mobilized to cushion the most severe shocks. If necessary, there may also be room to adjust debt obligations."

On financial stability, he stressed the need to act preemptively before financial imbalances build up. "Cleaning up after problems have erupted costs far more and the effects last much longer," he said. "I am confident that consistently implementing monetary policy to firmly bring inflation under control will also have a positive effect on resolving financial imbalances."

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