FOMC Members Support Rate Hike Due to High Inflation and Inflation Expectations

Single Person Insists on Interest Rate Freeze "Additional Strategy Still Needed"

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] Among the members of the Monetary Policy Committee of the Bank of Korea, the majority supported the base interest rate hike last month, except for one member.

According to the minutes of the first Monetary Policy Committee meeting in 2022, released on the Bank of Korea's website on the 3rd, most committee members expressed the view that it was desirable to raise the base interest rate to 1.25% at the meeting held on the 14th of last month, citing rapid inflation and financial imbalance as reasons. The Bank of Korea's Monetary Policy Committee raised the base interest rate by 0.25 percentage points from 1.00% to 1.25% at the monetary policy direction meeting on the 14th of last month.

One member said, "The most important reason for judging that the rate hike was appropriate is the trend of inflation and expected inflation," adding, "The consumer price inflation rate rose to the high 3% range year-on-year in both November and December last year, and it is expected to remain in the 3% range for the time being."

This member also mentioned, "A variable that needs to be carefully observed is expected inflation," stating, "The general public's expected inflation rate recorded 2.6%, close to 2.8% in January 2017, the highest since the inflation stabilization target was lowered to 2% in 2016." They explained that if the rise in expected inflation is left unchecked, the real interest rate will decrease, which would require a larger increase in the base interest rate in the future and could expand negative shocks to the real economy.

Another member said, "I think it is a decision consistent with the policy objective from a mid- to long-term perspective to proactively reduce the degree of monetary policy easing further so that expected inflation settles within an appropriate range and the risk of accumulating financial imbalances can be limited."

Another member also supported the 0.25 percentage point base rate hike, saying, "Despite two base rate hikes last year, the real interest rate level has hardly risen, and the potential loan demand of economic agents still appears to be high," adding, "It would be desirable for the monetary policy authorities to clearly convey their determination so that concerns about expected inflation do not expand under the current circumstances."

They continued, "Going forward, we need to carefully observe the recovery trend of the real economy, inflation trends, financial market conditions, the ripple effects of base rate hikes, and the impact of major countries' monetary policy changes on the domestic economy, while cautiously advancing the normalization process of monetary policy so that the base interest rate gradually approaches the neutral rate level."

While the majority of members supported the base interest rate hike, member Joo Sang-young was the only one to express an opinion to 'hold steady.'

He argued, "Although inflation in the United States appears urgent for policy response as it has deviated significantly from the long-term average target, in Korea, it can currently be assessed as a slight inflationary pressure," adding, "Considering the economic and infection spread situation, it is still a stage where supplementary strategies are needed." He added, "Since the base interest rate was already raised twice in August and November last year, it is necessary to observe the ripple effects, so maintaining the current level is appropriate."

This content was produced with the assistance of AI translation services.