Shin Hyunsong Signals Strong Growth Above 3% for Two Consecutive Years... Puts Weight on November Rate Hike (2nd Update)

This Rate Hold Was "The Fruits of Earlier Efforts"
Emphasizes Policy Room Gained Through Consecutive Rate Hikes in July and August
Tightening Pressures from Growth and Inflation Stronger Than at August Meeting
"Substantially" Higher Forecasts Signal Growth Above 3% for Two Consecutive Years
Tightening to Curb Inflation Could Continue for a Considerable Period
Exchange Rate Symbolizes Confidence in the National Economy... "The Won Is Still Undervalued"

A rate hold was expected. What the market was watching was Bank of Korea Governor Shin Hyunsong's remarks after the benchmark rate decision. Attention focused on how hawkish (favoring monetary tightening) his comments would be, as well as on clues to the timing, duration, and scale of any further rate hikes. In the end, Shin gave further support to market expectations that rates would rise in November. He also indicated that the tightening stance could continue for a considerable period.

Bank of Korea Governor Shin Hyunsong speaks at a press conference following the Monetary Policy Board meeting on the direction of monetary policy at the Bank of Korea in Jung-gu, Seoul, on the 22nd.

Signals Strong Growth Above 3% for Two Consecutive Years... Caution Against Gauging Next Rate Move Through Dissenting Opinions

On October 22, the Bank of Korea's Monetary Policy Board announced that it would keep the benchmark interest rate at 3.00% per year. The decision was unanimous. Governor Shin described the latest hold as "the fruits of earlier efforts." By raising rates consecutively in July and August, the Bank had bought time and secured more room for policy maneuver. "We have gained room to conduct policy in line with domestic economic conditions, without being driven by market circumstances," he said.

He also made clear that the tightening stance would continue. He assessed that the tightening pressures from growth and inflation were stronger than at the previous meeting in August. In particular, his indication that the Bank would raise its growth forecasts for this year and next year, as well as its inflation forecast for next year, increased the likelihood of another rate hike in November.

Governor Shin said that growth this year and next year would substantially exceed the forecasts issued in August (3.3% and 2.9%, respectively). Given the use of the term "substantially," the Bank is expected to raise its growth forecast for this year to the mid-to-high 3% range and its forecast for next year to above 3% in its revised economic outlook next month. Gong Dong-rak, a researcher at Daishin Securities, said, "This means strong growth of over 3% will continue for two consecutive years," adding, "I see this as the strongest possible signal from the monetary authorities of another rate hike." Core inflation next year is also expected to be higher than the previous forecast of 2.5%.

He also cautioned against interpreting this month's unanimous decision to hold rates as reducing the likelihood of another hike in November. This, too, points to a greater likelihood of a November hike. Responding to expectations that a dissenting opinion in favor of a rate hike would typically be expressed before a hike to signal a future increase, Governor Shin dismissed the idea, saying, "The consecutive rate hikes in July and August also departed from convention in some respects. There is no need to interpret dissenting opinions that way anymore. There was considerable agreement on the overall assessment that tightening pressures from growth and inflation had become stronger."

Bank of Korea Governor Shin Hyun-song speaks at a press conference following the Monetary Policy Board's monetary policy decision meeting at the Bank of Korea in Jung-gu, Seoul, on the 22nd.

"Until We Are Confident Inflation Is Converging Stably": Tightening to Curb Inflation Could Continue for a Considerable Period

Governor Shin also suggested that the monetary tightening stance aimed at curbing inflation could continue for a considerable period. On several previous occasions, he had emphasized that the Bank would "continue to respond (through the rate-hike cycle) until we are confident that inflation is converging stably toward the Bank's target." On October 22, he said, "There is a principle that we must achieve the inflation target of 2.0% within the time horizon for monetary policy, while taking various conditions, including growth, into account." He assessed that "inflation will come close to the target level in 2028." The precondition for maintaining a tightening stance is not merely that inflation reach the target level, but that there be confidence it is converging stably. Taken together, experts say his remarks suggest that the tightening stance could continue for a considerable period.

Son Jong-chil, a professor in the Department of Economics at Hankuk University of Foreign Studies, said, "Inflation needs to fall to the low 2% range, but since it has not, I think the Bank will maintain a stance that there is still ample room to raise rates." He added, "There seems to be a perception that our current policy rate is relatively low. The United States is in a situation similar to ours, with growth in the 3% range against a 2% inflation target. Considering that the upper end of its interest rate range is high at 4.00%, we have more room to act."

Bank of Korea Governor Shin Hyunsong speaks at a press conference after a Monetary Policy Board meeting to decide the direction of monetary policy at the Bank of Korea in Jung-gu, Seoul, on the 22nd.

"Still Undervalued"... A Stronger Won Can Boost Low-Income Households' Purchasing Power by Curbing Import Prices

Governor Shin emphasized that a rise in the value of the won would not only contribute to financial stability, but also improve household purchasing power by curbing import prices. He explained that this could have a greater impact on boosting the purchasing power of low-income households and could also help reduce inequality. "Lower import prices have a considerable effect on the purchasing power of low-income households," he said. "If the won strengthens by 10%, the purchasing power of the most vulnerable households, those in the lowest income quintile, rises by more than 0.4%. A stronger won also helps reduce inequality."

He said the exchange rate was "still undervalued." "Whether measured against the won-dollar exchange rate or on an effective exchange rate basis, it is true that the won is still weaker than in previous years," he said. "Based on the Bank for International Settlements (BIS) effective exchange rate index, the won remains undervalued relative to its long-term average of 101, with the index at 89 at the end of August." Governor Shin emphasized, "The won does not necessarily have to return to its historical average, but if we consider that average as one benchmark, the won is still weak."

Governor Shin has said that the exchange rate is not simply a price variable that facilitates trade, but also carries the important meaning of symbolizing confidence in a country's economy, and that the central bank has a role to play. "As a central bank that seeks to maintain the stability of the currency's value, the exchange rate is a very important variable," he said. "We will ensure that the Bank of Korea can help stabilize the market and serve as a focal point for market confidence."

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