FOMC Member "Rate Hike Possible Due to Inflation and Household Debt Concerns"... One Considers Rate Cut

Reviewing the October Monetary Policy Meeting Minutes
All Members Kept Interest Rates Steady but Disagreed on Future Rate Outlook

Members of the Monetary Policy Committee of the Bank of Korea unanimously decided to keep the base interest rate unchanged on the 19th of last month. However, the majority of the members judged that, due to factors such as the Israel-Hamas conflict, there is a concern that inflation will exceed the target level for a considerable period, and thus the possibility of additional tightening should be kept open. Additionally, most members expressed concerns about the continuous increase in household loans since April and emphasized the need to manage this growth to prevent it from leading to a rise in household debt.

However, opinions among the committee members diverged regarding the base interest rate for the next three months at the October meeting. One member argued that proactive additional rate hikes are necessary due to rising inflationary pressures, while another member suggested that decisions on further tightening or easing should be made by observing domestic and international financial market conditions and future trends in growth and inflation, effectively indicating that a rate cut should also be considered.

According to the minutes of the Monetary Policy Committee meeting released by the Bank of Korea on the 7th, the majority of members agreed that, based on the increased upside risks to inflation and rising household debt, the possibility of further rate hikes should be kept open.

One member stated, "Inflation is expected to exceed the target level for a considerable period, the upward trend in household debt is not easing, and vulnerabilities such as risks in real estate project financing (PF) have not been resolved. Going forward, while maintaining a tightening stance, we need to decide on additional rate hikes by closely monitoring the developments of the Israel-Hamas war, international oil prices and core inflation trends, the won-dollar exchange rate, household debt trends, the recovery level of the real economy including the real estate market, and monetary policies of major countries such as the United States."

Another member explained, "Considering looser real estate regulations compared to the past, relatively low mortgage loan interest rates, and the possibility of recognizing a bottom in housing prices, the increase in household loans could expand again. Therefore, it is necessary to maintain a high-interest-rate policy while continuing efforts for deleveraging through strengthened government management of household loans."

In particular, one member strongly expressed the need for proactive rate hikes. This member emphasized, "The steady increase in household and corporate loans indicates that monetary and credit policies have not been sufficiently tight as intended. The stagnation in the core inflation rate and general public inflation expectations over the past three months, exchange rate movements following the U.S. policy rate path, and upward pressures on the inflation trajectory compared to previous forecasts suggest that proactive additional rate hikes may be necessary for inflation to quickly stabilize at the target level."

On the other hand, one member stated that, besides the possibility of additional rate hikes, the possibility of rate cuts should also be kept open. This member said, "Due to increased geopolitical risks, downside risks to growth and upside risks to inflation have expanded, increasing uncertainty in policy conditions. It is desirable to decide on further tightening or easing by observing domestic and international financial market conditions and future trends in growth and inflation."