Lee Chang-yong, Governor of the Bank of Korea, is presiding over the first Monetary Policy Committee meeting of 2023 held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Joint Press Corps
The Monetary Policy Committee (MPC) of the Bank of Korea raised the base interest rate by 0.25 percentage points last month, but opinions were sharply divided on whether to raise rates further in the future. Some members said that additional rate hikes should be considered until there is confidence that the inflation rate will reach the target level, while others emphasized the need to carefully decide after observing the ripple effects.
According to the 'Minutes of the 1st Monetary Policy Committee Meeting of 2023' (held on January 13), released by the Bank of Korea on the 31st, six MPC members, excluding Governor Lee Chang-yong, continued to have a tense disagreement over additional rate hikes. At that time, four MPC members expressed the opinion that the base rate should be raised by 0.25 percentage points, while members Joo Sang-young and Shin Sung-hwan dissented, favoring a freeze. However, there were slightly more opinions advocating caution regarding further rate hikes.
One member who supported raising the base rate said, "Considering the easing of liquidity constraints in the domestic financial market and the ongoing tightening in major countries such as the United States, it is necessary to raise the base rate by 25bp (1bp = 0.01 percentage points) this time as well." He added, "However, regarding future base rate operations, if the inflation rate continues to slow as currently projected, we should carefully decide on additional hikes, taking into account the burden of economic downturn and financial stability risks due to the rise in real interest rates."
Another member who favored a freeze said, "Financial conditions have already entered a sufficiently tight zone, and the impact on the real economy is expected to become more pronounced this year." He added, "It is appropriate to decide on additional tightening after observing the extent of the ripple effects of the sustained tightening policy, the real economy trends, and external conditions."
Another member emphasized, "The effects of the tight monetary policy over the past year and a half are becoming evident, and the asset market, led by the housing market, continues to show sluggish trends with a sharp contraction in transactions." He continued, "Recently, the growth rate of the broad money supply (M2) has sharply slowed, and if this trend continues, a decrease in real money supply adjusted for inflation cannot be ruled out, which means that the stage to be cautious about expanding inflationary pressure from the demand side has already passed."
Lee Chang-yong, Governor of the Bank of Korea, is presiding over the first Monetary Policy Committee meeting of 2023 held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Joint Press Corps
On the other hand, another member advocating for a base rate hike said, "Although the domestic economy is expected to slow down and remain below the potential growth rate for some time, it is necessary to endure short-term growth slowdown to bring the currently high and persistent inflation back to the target level." He emphasized, "I believe it is important to firmly maintain a tightening policy stance until the trend of inflation converging to the target level is confirmed."
Another member also explained, "Future monetary policy decisions should comprehensively consider the conditions of financial and foreign exchange markets, growth and inflation outlooks, and the development of major countries' monetary policies." He added, "The tightening stance should be maintained until there is confidence that the inflation rate will converge close to the target level in the near future, and additional base rate hikes should be considered if necessary."
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