Lee Chang-yong "Inflation-Centered Monetary Policy Desirable Until Trend Changes" (Comprehensive)

Q3 Inflation Rate Peaks

Lee Chang-yong, Governor of the Bank of Korea, holds a briefing session on the status of inflation target management at the Bank of Korea press room in Jung-gu, Seoul on the 21st. Photo by Moon Ho-nam munonam@

[Asia Economy reporters Seo So-jung and Moon Je-won] Amid the ongoing high inflation situation, Lee Chang-yong, Governor of the Bank of Korea, expressed the view that it is desirable to conduct monetary policy with a focus on inflation until the steep inflation trend changes.

At a press briefing on the 21st explaining the 'Price Stability Target Operation Status Review' report, Governor Lee stated, "It is highly likely that the domestic consumer price inflation will exceed last month's forecast path (an annual increase rate of 4.5%) going forward."

Governor Lee assessed, "Although there is significant uncertainty related to the future inflation trend, including the developments in the Ukraine situation, trends in international raw material prices, and the extent of wage increases due to inflation, overall, upward risks seem to dominate."

He added, "Only four weeks have passed since last month's Monetary Policy Board meeting, but there have been considerable changes in inflation conditions during this period. Expectations for the peak of U.S. inflation have been delayed more than initially anticipated, increasing financial market volatility. Additionally, concerns over supply disruptions have grown due to the European Union's (EU) restrictions on Russian oil imports. As a result, international oil prices have surged significantly from around $109 just before the last Monetary Policy Board meeting to an average of about $120 in June, substantially exceeding the assumptions made in the previous forecast."

Accordingly, he judged that the domestic consumer price inflation is also likely to exceed last month's forecast path. He said, "The impact of overseas supply shocks may be prolonged. According to major global forecasting institutions, the high oil price situation is unlikely to be resolved easily, and elevated international food prices are also expected to remain high."

He explained that the agflation phenomenon caused by rising international food prices has characteristics of downward rigidity and high persistence, making its effects likely to last long, while global supply chains are also experiencing delayed recovery.

Governor Lee expressed concern that if inflation expectations are not properly controlled amid the possibility of prolonged domestic and international inflationary pressures, the high inflation situation could become entrenched. He pointed out, "Short-term expected inflation has exceeded the inflation target of 2%, surpassing 3%, while long-term expected inflation has risen to around 2%. The inflation expectations indicator (BEI), which reflects market expectations, is also showing high volatility and steadily increasing."

He emphasized, "Going forward, monetary policy needs to be conducted flexibly and data-dependently, comprehensively considering economic indicators such as inflation, economic conditions, financial stability, and foreign exchange market situations. However, in the current phase where inflation is continuously rising, it is desirable to operate monetary policy focusing on inflation until the steep inflation trend changes."

He continued, "Protection for vulnerable groups who are facing difficulties due to increased interest payment burdens amid rising inflation and interest rates is important. We will strive to prepare more sophisticated and micro-level support measures through policy coordination."

Lee Chang-yong, Governor of the Bank of Korea, holds a briefing session on the status of inflation targeting operations at the Bank of Korea press room in Jung-gu, Seoul on the 21st. Photo by Moon Ho-nam munonam@

Regarding the possibility of implementing a 'big step' of raising the base interest rate by 0.5 percentage points at once, he said, "We do not decide interest rates based solely on inflation. Since about three weeks remain, we will decide after reviewing the information." On the exchange rate, he said, "If a concentration phenomenon occurs, there is a reason to intervene."

In response to market forecasts that the Bank of Korea's base interest rate could reach 2.75?3% by the end of the year, he said, "International financial markets and oil prices are unstable, and since the market is in a period of adapting to new information following the Federal Open Market Committee (FOMC) announcement, it is premature to assume whether it is reasonable to expect further rate hikes or whether the inflation level we anticipate will exceed the mid-5% or 6% range."

Regarding the timing of the peak in domestic inflation, he said, "The market and general view expect the inflation rate to peak around the third quarter. However, uncertainties such as the war remain significant."

On concerns about a Korea-U.S. interest rate inversion due to the sharp rate hikes in the U.S., he said, "If the interest rate gap between us and the U.S. becomes too large as U.S. rates rise, various problems such as exchange rate fluctuations and capital outflows may occur. It is important to appropriately respond by examining whether the interest rate gap is unique to Korea or also occurring in other major countries, and what impact this has on the exchange rate and capital outflows."

Regarding some views that the neutral interest rate should be publicly disclosed, he added, "Personally, I believe that the Bank of Korea explicitly announcing it could inevitably cause misunderstandings."

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