Bank of Korea Deputy Governor: Inflation Persists Above Target, Further Rate Hikes Expected

The latest remarks from senior officials at the Bank of Korea have sent a hawkish signal, further fueling market expectations for another interest rate hike in August.

According to Bloomberg, Ryoo Sangdai, the soon-to-depart Senior Deputy Governor of the Bank of Korea, stated on Tuesday that as economic growth continues to feed into core inflation, the Bank of Korea will likely need to raise interest rates further. He pointed out that the recent stabilization of the South Korean won and the decline in the Korea Composite Stock Price Index (KOSPI) have provided some room for monetary policy decisions, but these are not the key factors determining the policy direction.

Ryoo stated that the timing and pace of subsequent rate hikes will still depend on new data. The updated economic growth and inflation forecasts to be released by the Bank of Korea this month will serve as important bases for the policy meeting on August 27. He emphasized that monetary policy needs to be forward-looking, and further rate hikes remain expected as policymakers reassess growth and inflation trajectories.

Stubborn Core Inflation Shifts Policy Focus to "Persistence"

South Korea's overall CPI rose 2.8% year-on-year in July, a decrease from the previous month but still above the Bank of Korea's 2% inflation target; core CPI rose to 2.6%, indicating that underlying price pressures remain strong.

Ryoo believes that this round of inflation is unlikely to repeat the sharp surge seen after the Russia-Ukraine conflict, but prosperity in the semiconductor industry driving wage growth and domestic consumption expansion may keep inflation above the 2% target for a longer period. He stated, "The increase may not be large, but it could be persistent."

He indicated that current policy decisions need to focus more on whether core inflation can remain at high levels, whether economic growth momentum can continue, and financial stability risks, rather than short-term market fluctuations.

Economic Growth Exceeds Expectations, Supporting Further Rate Hikes

South Korea's recent economic performance has been stronger than expected, providing support for the central bank to maintain its tight stance.

South Korea's Q2 GDP grew 0.6% quarter-on-quarter, exceeding market expectations; workday-adjusted July exports increased by nearly 70% year-on-year, with export sectors such as semiconductors continuing to show strength.

In July, the Bank of Korea raised the base interest rate by 25 basis points to 2.75%, marking the first rate hike since early 2023. At that time, Bank of Korea Governor Shin Hyun-song stated that the next few policy meetings would be "open," with all options under consideration.

Previously released meeting minutes also showed that there is still support within the Bank of Korea for further rate hikes. Ryoo stated that if he were still in office this month, he would focus on the central bank's latest growth and inflation forecasts, while combining high-frequency indicators such as trade data and credit card consumption to judge the timing of subsequent rate hikes.

Weak South Korean Won Remains a Risk for Imported Inflation

Exchange rates are also a factor the Bank of Korea needs to consider when continuing to tighten policy.

Ryoo stated that although the South Korean won has stabilized recently, it remains overall at a weak level, and rising import costs may continue to push up inflation.

However, he expects the South Korean won to gradually strengthen in the medium to long term. South Korea's record trade surplus and current account surplus, along with market expectations for a further narrowing of the interest rate differential between South Korea and the United States, could all become factors supporting the South Korean won.

Ryoo joined the Bank of Korea in 1986, and his term will expire on August 20, prior to the policy meeting on August 27. With core inflation remaining at high levels and economic performance showing strength, some economists have already included another rate hike in August in their baseline forecasts.