[BOJ Big Step] Lee Chang-yong "It is desirable to raise the base interest rate by 0.25%p for the time being"

Bank of Korea Governor Lee Chang-yong is answering questions from the press at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Seo So-jeong] Lee Chang-yong, Governor of the Bank of Korea, stated that it is desirable to gradually raise the base interest rate by 0.25 percentage points for the time being.

Governor Lee said at a press conference held immediately after the Monetary Policy Committee's regular meeting on the 13th, "Since a high inflation trend is expected to continue for the time being, it is necessary to maintain the policy of raising the base interest rate." On the same day, the Monetary Policy Committee unanimously implemented a 'big step' by raising the base interest rate by 0.50 percentage points from the existing annual rate of 1.75% to 2.25%.

Regarding the pace of future hikes, Governor Lee said, "Since we preemptively raised the base interest rate by 0.50 percentage points today, if the domestic inflation trend does not deviate significantly from the current forecasted path, that is, if it remains at a higher level than now for the next few months and then gradually declines, it is desirable to gradually raise the interest rate by 0.25 percentage points for the time being."

However, he added, "If inflation accelerates further due to changes in domestic and external conditions, or conversely, if the economic slowdown is greater than expected, the timing and extent of policy responses may also change." He left room for caution by saying, "In this process, we will closely monitor the impact of increased exchange rate rises and capital outflow pressures in emerging countries and the resulting changes in the international financial market situation on our financial and foreign exchange markets."

Governor Lee cited the recent sharp rise in inflation as the reason for the big step decision. The consumer price inflation rate in June rose to the 6% range for the first time since the 1998 foreign exchange crisis, and the pace is also accelerating. It took seven months for the inflation rate to rise from the 3% range to the 5% range, but it rose to the 6% range within just one month while in the 5% range. Governor Lee explained, "Not only supply factors but also demand pressures have increased, and the proportion of items with inflation rates exceeding 5% has reached 50%, indicating a wider spread of inflation. As a result, both core inflation and general public inflation expectations have risen to a high level close to 4%."

He continued, "The inflation rate in the 6% range is already at a high level, the spread is becoming broader, and the negative real interest rate has significantly expanded. Short-term inflation expectations are approaching 4%, and wage growth is also rising. Inflation expectations are spreading, and the interaction between prices and wages is strengthening, raising concerns that the high inflation situation may become entrenched." He emphasized the need for policy response.

Regarding concerns about an economic recession, he said, "It is true that the downside risks to the global economy have increased, but given the high uncertainty related to the Ukraine situation and the pace of interest rate hikes in major countries, it is considered desirable to respond after further understanding the development of external conditions and their impact on the domestic economy."

On the point that interest rate hikes may exacerbate difficulties in vulnerable sectors, he said, "If we fail to respond to inflation at this stage, the interaction between prices and wages will strengthen, and the high inflation situation will become entrenched, making larger interest rate hikes inevitable in the future, which could cause greater damage not only to the overall economy but also to vulnerable sectors." He added, "During the process of raising interest rates, the central bank will work with the government to find selective support measures for vulnerable sectors facing increased difficulties."