Seo Young-kyung, KFTC Member: "Inflation Peaks in Q3... Gradual Interest Rate Hike is Desirable"

Accepting Growth Loss Inevitable for Price Stability
Inflation Rate Expected Above 3% Next Year
Gradual Interest Rate Hike Path Recommended Moving Forward

Seoyoung Kyung, Member of the Monetary Policy Committee at the Bank of Korea

Monetary Policy Committee member Seo Young-kyung explained the background behind the Bank of Korea's historic first 'big step' (a 0.5 percentage point increase in the base interest rate) implemented on the 13th, stating that "it was deemed inevitable to prioritize price stability while accepting the cost of growth loss."

She added, "The inflation rate is expected to exceed 6% for the time being, peak in the third quarter, and then gradually decline," and said, "(The future base interest rate) should follow a gradual upward path."

On the afternoon of the 27th, Seo gave a special lecture titled 'Background of Monetary Policy Stance Change and Risk Factors' at the Booyoung Taepyeong Building Convention Hall in Jung-gu, Seoul, during the 'BOK Friday Lecture Series.'

Regarding the Bank of Korea's rapid interest rate hikes since August last year, Seo explained, "Considering that the inflationary impact lag of interest rate hikes lasts several months, advancing the timing of monetary easing adjustments is expected to be effective in mitigating secondary ripple effects through inflation expectations and preventing the entrenchment of a high inflation phase."

She continued, "Since the economic growth rate is expected to exceed the potential level for the time being while the rapid inflation trend continues, it was judged inevitable to prioritize price stability while accepting some growth loss costs," and added, "It was also considered necessary to prevent a rapid inversion of domestic and foreign interest rate differentials to ease pressure on won depreciation and incentives for external debt increase."

Seo noted that although the recent upward trends in household debt and housing prices have slowed, they remain high relative to economic size and income, emphasizing the need to correct the rapid increase in corporate credit and market liquidity through interest rate hikes.

She identified uncertain economic outlooks and inflation rates after the second half of the year, as well as the deterioration of financially vulnerable groups, as risk factors related to monetary policy.

She said, "The inflation rate is expected to exceed 6% for the time being, peak in the third quarter, and then gradually decline," but added, "However, demand and supply-side pressures will continue next year, maintaining a high level above 3%, and especially if energy prices surge during winter, the inflation peak could be delayed."

Seo stated, "Considering that private debt has increased mainly among high-income, high-credit borrowers, the financial system risk due to rising interest rates is judged to be limited," but cautioned, "It is necessary to prepare for the risk of deterioration among vulnerable sectors such as financially weak households and firms, young over-indebted individuals, and liquidity-short self-employed persons."

In particular, Seo mentioned that interest rate hikes could have positive effects on income and asset inequality. She said, "In the long term, normalization of interest rates is expected to alleviate income inequality by reducing asset imbalances, and by curbing inflation, it is anticipated to ease the expenditure burden on low-income groups with a high proportion of essential goods."

Considering the recent economic and financial situation, Seo emphasized the need to continue focusing on price stability in monetary policy, warning that stopping monetary tightening while inflation expectations remain unstable would inevitably lead to larger interest rate hikes and growth losses later due to a resurgence of inflation.

She stressed, "Under the forecast that economic growth rates in the second half of this year and next year will slightly exceed potential growth rates and inflation will pass its peak within a few months and gradually stabilize, a gradual (interest rate) increase path is desirable."

Earlier, Bank of Korea Governor Lee Chang-yong also indicated in a press meeting after the big step on the 13th that the base interest rate would be raised by 0.25 percentage points going forward.

However, Seo noted, "If inflationary pressures persist while downside growth pressures expand, intensifying the trade-off between growth and inflation, policy decisions are expected to become difficult," adding, "In such cases, it is necessary to carefully review the trade-off between growth and inflation, as well as current and future growth and inflation paths, and seek appropriate monetary policy."

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