"Rising Inflation Concerns"... Many Monetary Policy Committee Members Emphasize Base Rate Hike

[Image source=Yonhap News]

The Monetary Policy Committee of the Bank of Korea kept the base interest rate at 1.25% last month, but many committee members emphasized the need for further rate hikes due to rapidly rising inflation.

According to the minutes of the Monetary Policy Committee meeting released on the Bank of Korea’s website on the afternoon of the 15th, four out of six committee members, excluding Governor Lee Ju-yeol, indicated additional rate increases at the monetary policy direction meeting held on the 24th of last month.

One member stated, "Considering the domestic economy’s growth, inflation, and financial conditions comprehensively, it is necessary to further reduce the degree of monetary policy easing," adding, "Especially since the upside risks to the inflation path heavily depend on inflation expectations and given the policy lag, proactive measures are important."

Another member explained, "The domestic economy is maintaining a recovery trend, and the GDP gap rate (the difference between actual GDP and potential GDP) is expected to turn positive in the first half of the year," adding, "As inflation has exceeded the target for a prolonged period, upward pressure on expected inflation continues to expand." They explained that interest rate hikes are necessary to stabilize the inflation rate at the target level over the medium term.

There was also a member who said, "The elevated level of expected inflation and the high liquidity growth suggest that the current monetary policy stance remains considerably accommodative, so further adjustment of the easing degree seems necessary."

Concerns were raised that if adjustments are not made at the appropriate time and pace, a larger adjustment will be inevitable later. This member said, "In such a case, it could cause greater shocks to the economy and financial markets," and added, "We need to closely monitor trends in inflation and inflation expectations, domestic economic conditions, changes in major countries’ monetary policies, and domestic and international financial market situations, and raise the base interest rate at the appropriate time."

However, there were also opinions that raising the base interest rate could negatively impact the economy. One member said, "If we judge that the crisis is over based solely on aggregate indicators like GDP growth rate or accelerate rate hikes based on cost-push inflation, the momentum of economic recovery will slow down." They explained that since employment has not yet recovered to pre-COVID-19 levels, rapid rate hikes could be detrimental to the economy.

Some members expressed concerns about economic uncertainties due to the war between Russia and Ukraine. One member said, "While inflation will be the most important variable to watch going forward, we must carefully observe uncertainties in asset markets caused by changes in major countries’ monetary policies as external factors, and the development of global risks stemming from the Ukraine situation."

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