Shin Hyun-song, Head of BIS Research Department, "Curbing South Korea's Inflation is the Top Priority"

'G20 Global Financial Stability Conference' Press Briefing
Emphasizing the Importance of Proactive Inflation Response

[Asia Economy Reporter Seo So-jung] Shin Hyun-song, Director of the Research Department at the Bank for International Settlements (BIS), emphasized that as the U.S. Federal Reserve (Fed) continues its tightening stance, South Korea should also focus its monetary policy on curbing inflation.

At a press briefing held on the 21st during the 'G20 Global Financial Stability Conference' jointly hosted by the Ministry of Economy and Finance and the Korea Development Institute (KDI) at the Seoul Plaza Hotel, Director Shin stated, "Inflation, by its nature, once it begins, initially affects a limited number of items but gradually expands to more items, leading to interactions where other prices rise as a result of responses by various economic agents," adding, "We need to break this chain."

Director Shin, a former Princeton University professor, served as the International Economic Advisor to the Blue House during the Lee Myung-bak administration. He is a renowned scholar who has been consistently mentioned as a candidate for Governor of the Bank of Korea from the Park Geun-hye administration until recently. Previously, he gained attention for predicting the global financial crisis at the 2005 Jackson Hole Conference in Wyoming and the 2006 International Monetary Fund (IMF) Annual Meeting.

Director Shin assessed that the Bank of Korea's monetary policy should also prioritize controlling inflation. With market expectations prevailing that the U.S. Fed will implement a 'giant step' by raising the policy interest rate by 0.75 percentage points at the Federal Open Market Committee (FOMC) regular meeting, he stressed that the Bank of Korea's Monetary Policy Committee meeting next month should actively consider monetary policy responses accordingly. When asked whether the Bank of Korea should take a 'big step' (raising the base rate by 0.50 percentage points) next month, Director Shin replied, "In implementing monetary policy, the interactions among central banks must be considered," and added, "At this point, curbing inflation is the urgent priority."

Director Shin explained that empirical research by BIS on over 70 cases of tightening from the 1980s to the present shows that cases where inflation was addressed early, assuming a certain level of interest rate hikes, yielded better outcomes than those with delayed responses. He said, "Given the uncertainties depending on the situation, financial and external conditions, empirical research can have a considerable margin of error, but if there is a situation requiring interest rate hikes, it is better to respond proactively rather than delay."

Amid growing market concerns as the won-dollar exchange rate approaches 1,400 won, Director Shin mentioned that more weight should be placed on the real effective exchange rate rather than the nominal exchange rate (exchange rate against the dollar) in the real economy. The real effective exchange rate reflects changes in prices and trade weights among trading countries and indicates the real value of each country's currency. He elaborated, "When viewed through the real effective exchange rate, there is little movement compared to the dollar exchange rate," and added, "Countries that have well-controlled inflation have seen their currencies strengthen in terms of the real effective exchange rate, and South Korea is one of them."

He continued, "Since the 2008 financial crisis, awareness of financial stability has significantly increased, and if preemptive safety measures are established, conditions arise that can withstand shocks," evaluating, "From a broad perspective, looking at the real economy, financial stability indicators, soundness, and liquidity indicators, most countries are in good shape except for a few."

Director Shin emphasized, "Just like the saying 'fix the roof while the sun is shining,' it is important to take preemptive soundness measures to maintain resilience even if external conditions change significantly," and added, "Just as a marathon runner builds endurance through training to withstand difficult conditions, economic policy should be approached with this philosophy."

Regarding the adequacy of South Korea's foreign exchange reserves, Director Shin stated, "Currently, due to a strong dollar, there is a need to sell dollars, but a few years ago, there was capital inflow, asset price increases, and easing of financial conditions due to a weak dollar," adding, "During such times, it is necessary to accumulate foreign exchange reserves at an appropriate pace to achieve policy objectives, and when financial conditions are tight, have a cycle that allows releasing reserves and then restoring them."

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