[Hanae Big Step] Lee Chang-yong "Future 0.25%p Increases... Reasonable to Expect 2.75~3% by Year-End"

BoK Governor's Press Conference Immediately After Monetary Policy Meeting
Price Peak Expected in Late Q3 or Early Q4
Year-End Base Rate of 2.75~3.0% Reasonable
Close to Lower Bound of Neutral Rate, Not Tightening Yet

Bank of Korea Governor Lee Chang-yong is answering questions from the press at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Kang Jin-hyung aymsdream@

Lee Chang-yong, Governor of the Bank of Korea, said on the 13th that if the inflation trend does not deviate significantly from the current forecasted path, it would be preferable to raise interest rates by 0.25 percentage points each time rather than taking a 'big step' (a 0.50 percentage point increase in the base rate). He also explained that the market's expectation of the Bank of Korea's base rate rising to 2.75?3.0% by the end of the year is reasonable.

Governor Lee stated at a press conference held at the Bank of Korea headquarters following the regular Monetary Policy Committee (MPC) meeting that morning, "Regarding the direction of monetary policy operation, since we have proactively raised the rate by 50 basis points (1bp = 0.01 percentage points) today, I believe it is appropriate to gradually raise the rate by 25 basis points rather than taking big steps for the time being."

Earlier, the MPC unanimously decided to raise the base rate from the previous 1.75% to 2.25%, an increase of 0.50 percentage points. This is the first time in history that the Bank of Korea has implemented a big step. Governor Lee explained, "While the MPC has lowered rates by more than 50bp at once before, this is the first time it has raised rates by that amount, so I want to emphasize that this decision was made with a heavy sense of responsibility."

Regarding the reason for planning to raise the base rate by 0.25 percentage points going forward, Governor Lee said, "Assuming that inflation will be slightly above 6% for the next few months and will decline from the latter part of the third quarter, we expect that the 50bp increase will help lower inflation expectations. Based on this trend, it is appropriate to proceed gradually with 25bp increments."

The Bank of Korea expects inflation to peak in the latter part of the third quarter or early fourth quarter and then decline gradually. If this forecast holds true, the possibility of big steps after August is low.

However, Governor Lee added, "Saying there is no possibility of a big step might be too strong. If the situation in Ukraine worsens unexpectedly, inflation accelerates, or the economic recession deepens, we can respond flexibly and change direction. The decision on whether inflation is 7%, 6.5%, or 7.5% will be made by the MPC members based on the data they review."

Bank of Korea Governor Lee Chang-yong is answering questions from the press at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Kang Jin-hyung aymsdream@

Regarding the market expectation that the base rate could rise to 2.75?3% by the end of the year, he said, "Given the high inflation trend, this is naturally reasonable," but added, "Because of the high uncertainty, whether it will actually be below 2.75% or reach 3% depends on various factors such as major advanced countries' interest rates, oil prices, and the economy."

Governor Lee explained that since the base rate has not yet reached the neutral rate level, raising it one or two more times would not constitute tightening. He said, "The neutral rate has a very wide range in academic terms, and even raising the rate to 2.25% brings it close to the lower end of the neutral rate range. So, it cannot yet be considered that we have reached the neutral rate level."

Governor Lee revealed that this year's domestic economic growth rate is expected to fall short of the 2.7% forecast made in May. He said, "I expect the growth rate to remain in the mid-2% range this year and in the low 2% range next year, which is higher than the potential growth rate. At this point, the possibility of the growth rate falling below 2% is not high, so it is not a time to worry about stagflation."

Regarding concerns that the rapid interest rate hikes by the U.S. Federal Reserve (Fed) could cause an inversion of the Korea-U.S. base rate differential, he said, "I do not think the rate inversion itself is a problem. There have been cases of rate inversion in the past, sometimes exceeding 100bp, so it is difficult to say how much can be tolerated. We need to observe the impact on the market and make judgments accordingly."

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