Acting Chair of the Monetary Policy Committee: "The Main Focus of the Base Interest Rate Hike is Inflation... Response is Inevitable"

Draws the Line on the Possibility of Entering Stagflation

Joo Sang-young, Acting Chairman of the Monetary Policy Committee, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 14th. 2022.04.14. Photo by Joint Press Corps

[Asia Economy Reporter Seo So-jeong] The Monetary Policy Committee of the Bank of Korea raised the base interest rate by 0.25 percentage points on the 14th, citing domestic inflation and growth trends as the main reasons. Although the tightening stance of the U.S. Federal Reserve (Fed) also had an impact, it was explained that domestic inflation conditions had a more direct influence.

Joo Sang-young, a member of the Bank of Korea's Monetary Policy Committee (acting chairman), stated at an online press conference held after the base rate decision, "The prospect of U.S. rate hikes has been clear since early this year, but in deciding this rate hike, we placed more emphasis on domestic inflation and growth trends." The Monetary Policy Committee meeting was chaired by Acting Chairman Joo as candidate Lee Chang-yong for the Bank of Korea governor was preparing for a confirmation hearing.

Regarding the background of the rate hike, Joo said, "Since the Monetary Policy Committee meeting at the end of February, there have been significant changes in domestic and international economic and financial conditions, including the Ukraine crisis. Due to the Ukraine crisis, we judged that inflationary pressures might last longer than expected, and despite the vacancy in the governor position, we could not avoid responding."

On future rate outlooks, he mentioned, "Inflation is rising sharply, and with the Fed's rapid tightening anticipated, market expectations for the base rate have increased." The rate hike decision was unanimous among the six Monetary Policy Committee members present. Joo conveyed the atmosphere, saying, "Expectations for a rate hike have increased, but market expectations have also become more diverse. The opinions of the committee members also seem to have become more varied than before."

Joo projected that the consumer price inflation rate would remain high in the 4% range for the time being, and the annual inflation rate would significantly exceed the 3.1% forecast released by the Bank of Korea in February.

Furthermore, regarding the future direction of monetary policy, he emphasized a balanced consideration of inflation and growth. Joo stated, "Looking at inflation, one might think we need to raise rates further, but at the same time, downside risks to the economy have increased, so the Monetary Policy Committee's views inevitably become more diverse."

Joo Sang-young, Acting Chairman of the Monetary Policy Committee, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the morning of the 14th. 2022.04.14. Photo by Joint Press Corps

Regarding the possibility of entering stagflation (economic stagnation with rising inflation), he expressed that although inflation is somewhat high, it is not a cause for concern. Joo said, "Although the inflation rate is around 4%, growth is still expected to be in the mid-to-high 2% range. If growth continues at this level, inflation may be somewhat high, but it cannot be called stagflation."

He added, "Looking at various indicators, despite the rate hikes, there seems to be little impact, especially on the export sector. Consumption was sluggish in January and February due to the spread of Omicron, but since mid-March, a rapid recovery has been observed, so positive factors may offset the negative effects of the rate hike."

Regarding prior communication with Governor candidate Lee Chang-yong, he dismissed it, saying, "We had a brief informal meeting as a courtesy, but we have not discussed the direction of monetary policy." On Lee's remark about concerns over inflation due to won depreciation, Joo commented, "If the exchange rate rise is temporary, the effect would be less, but if it persists for a long time, it could have a significant impact on inflation."

When asked about the timing of the inflation peak, Joo said, "Before the Ukraine crisis, we expected inflation to peak after the first quarter or at the latest after the second quarter and then decline, but with the prolonged Ukraine crisis, it is difficult to predict when the peak will occur. Currently, international oil prices are affecting high inflation, and if they show a pattern of rising early and falling later, inflation could decrease somewhat by the end of the year. However, it depends on how international oil, raw materials, and grain prices develop," he added.