FOMC Members: "Must Prevent Entrenchment of High Inflation Phase... Maintain Rate Hike Stance for the Time Being"

Minutes of Last Month's Monetary Policy Direction Meeting Released

[Asia Economy Reporter Seo So-jeong] The Monetary Policy Committee of the Bank of Korea unanimously raised the base interest rate by 0.25 percentage points last month and viewed that it is desirable to maintain the base rate hike stance for the time being to prevent the entrenchment of the high inflation phase.

On the afternoon of the 13th, the Bank of Korea disclosed the minutes of the Monetary Policy Committee meeting held on the 25th of last month on its website, stating that if domestic and international uncertainties persist, the persistence of inflation may increase, potentially prolonging the high inflation phase.

One MPC member said, "The biggest risk currently facing our economy is the entrenchment of the high inflation phase," adding, "Above all, the high inflation rate across the economy reduces real income, threatening the basic livelihood of low-income vulnerable groups with small real assets, and causes considerable economic harm by distorting consumption and investment decisions of economic agents through changes in expectations of real returns."

He added, "Since August last year, the monetary policy easing stance has been reduced, so the current base interest rate appears to have reached a neutral range. However, to control domestic inflationary pressures and high inflation expectations, it is necessary to maintain the base rate hike stance for the time being."

Another member also viewed that maintaining a tightening stance is necessary from the perspective of continued high inflation and wage growth. He said, "Although consumer prices and short-term expected inflation are estimated to have slightly declined due to recent drops in international oil prices and some raw material prices, demand-side inflationary pressures persist as the GDP gap remains positive, and there are upside risks to supply prices."

From the perspective of the international balance of payments, it is also desirable that excessive interest rate differentials with the United States do not persist. He pointed out, "Although in the past, when the policy rates between Korea and the U.S. were inverted, foreign investment in domestic bonds generally continued to flow in, and foreign capital inflows and outflows in the domestic bond market have remained relatively stable until recently, it is difficult to rule out the possibility of some foreign capital outflows domestically if the interest rate gap widens and the inversion period lengthens or if financial instability spreads in major emerging countries."

One member mentioned, "Although the trade-off between growth and inflation has widened, considering that the output gap maintains a slight positive and the inflation gap has significantly expanded, it is appropriate to operate monetary policy with an emphasis on curbing inflation for the time being."

Another member explained, "Since consumer price inflation exceeded the medium-term target of 2% in April last year, it has remained at a high level, and it is unlikely to return to the medium-term inflation target by the first quarter of next year, two years later." He supported the rate hike, saying, "If high inflation persists for more than two years, economic agents tend to actively collect inflation information and reflect it in decision-making, which could strengthen inflation momentum through the interaction of expected inflation and prices."

However, there was also an opinion that the pace of rate hikes needs to be adjusted as the impact of global economic slowdown and rising prices on the domestic economy is expected to intensify in the second half of the year. One member said, "In our economy, housing prices and household debt relative to income have already risen to a level that requires adjustment, so as the economy enters a downturn phase combined with high interest rate conditions, the slowdown in the economy may deepen and the recession period may be prolonged." He added, "Even if additional rate hikes are made to respond to inflationary pressures in the future, it is necessary to carefully adjust the speed and extent."