Bank of Korea: "Asserting an October interest rate hike is unwarranted... Nominal income levels match those of the high-growth era"

The Bank of Korea stated that anticipating an additional base rate hike in October solely due to geopolitical instability in the Middle East and risks of financial imbalances is unwarranted. However, it emphasized that the recent trend of nominal income growth has reached levels only seen during the high-growth era of the 1970s, and such developments will be critically reflected in monetary policy decisions regarding inflation and asset markets.

Park Jong-woo, Deputy Governor of the Bank of Korea, said at the briefing on the Monetary and Credit Policy Report on the 10th that the decision on the possibility of an additional interest rate hike in October "will be made during a live meeting where all data available up to just before the meeting will be comprehensively reviewed."

He expressed a cautious stance toward speculation that renewed tensions in the Middle East have increased inflationary pressures and the likelihood of an additional interest rate hike. Deputy Governor Park stated, "We believe the impact on inflation may be slightly greater than the impact on growth," while adding, "It remains uncertain how long these tensions will persist."

He further noted, "Since the October meeting is scheduled for later in the month, we must confirm various indicators, including September's inflation data, before then. At this point, it is difficult to definitively predict whether inflation will move in a specific direction or what the October interest rate will be."

He also drew a line against expectations of an October rate hike based on financial imbalance risks. Deputy Governor Park said, "Addressing financial imbalance issues through interest rates alone carries significant burden and is not practically easy," adding, "It is unwarranted to interpret that interest rates will be raised further in October solely due to certain financial stability indicators."

Regarding efforts to ease instability in the housing market, he explained, "Not only interest rates but also macro-prudential policies related to housing supply and lending must be pursued in the same direction over a long period."

He assessed that the two consecutive interest rate hikes in July and August would work to reduce inflationary pressures. Deputy Governor Park stated, "By raising the base rate twice consecutively, we have essentially implemented so-called 'front-loading.' Since monetary policy takes time to affect inflation, its effects will not appear immediately."

Conversely, he evaluated that nominal income, which has surged due to a semiconductor boom, could increase pressure on inflation and financial stability through consumption and asset markets. Deputy Governor Park remarked, "Such a high rate of nominal income growth is the first time we have experienced since the high-growth era of the 1970s," adding, "Figures that would typically only appear during a high-growth period are now emerging."

He further emphasized, "Income growth is fundamentally altering key economic indicators through consumption and asset markets, making forecasts extremely difficult. Monetary policy must inevitably take these factors into serious consideration."

He viewed it as more likely that the benefits of the semiconductor boom will take time to spread across the entire economy rather than remaining confined to certain companies and workers. Deputy Governor Park explained, "Since the rate of income growth itself is unusually high, effects will first appear in related regions, but they will gradually spread throughout the economy over time through increased tax revenues and other channels."

Choi Chang-ho, Director of the Monetary Policy Department at the Bank of Korea, stated, "Nominal growth reached nearly 22% in the first half of the year, creating a significant gap with real growth. Income not captured by real growth remains within the economy and can spill over into domestic demand and asset markets."

Regarding current financial conditions, he assessed that the degree of easing has narrowed. Director Choi said, "In the first half, heightened risk appetite led to significantly accommodative financial conditions. Recently, however, as stock prices have corrected and interest rates have risen, the extent of easing has substantially decreased."

He explained that the current base rate is approximately at the upper end of the previously estimated neutral interest rate range. Deputy Governor Park added, "However, given changing circumstances, we are re-estimating potential growth and the neutral interest rate. There are difficulties in evaluating the interest rate level based solely on the previous range."

He viewed the recent decline in the won/dollar exchange rate as a factor lowering import prices but noted that rising oil prices could offset this effect. Deputy Governor Park stated, "While the exchange rate has fallen by about 200 won in the short term, potentially affecting profits of some export companies, overall corporate profits have increased significantly on an annual basis, meaning their impact on domestic growth and income remains substantial."