Growing Momentum for Baby Step... KIM So-Young, Monetary Policy Committee Member, Says "Domestic Financial Stability Must Be Considered"

National Economic Advisory Council-Korea Financial Society Forum
Seo: "Need Flexible Response to Tightening Magnitude and Speed"
Final Interest Rate Maintained at Existing 3.5% Level

Seoyoung Kyung, a member of the Monetary Policy Committee, is attending and presenting at the 'National Economic Advisory Council-Korea Finance Association Joint Policy Forum' held on the 15th at the Korea Chamber of Commerce and Industry in Jung-gu, Seoul. (Photo by Bank of Korea)

Seo Young-kyung, a member of the Monetary Policy Committee of the Bank of Korea, said on the 15th, "I think we should focus on domestic financial stability," and added, "The magnitude and speed of tightening should be responded to flexibly." This is interpreted as the need to adjust the pace going forward, although strong tightening policies have been implemented so far to stabilize prices. Accordingly, there is an analysis that the possibility of a 'baby step' (a 0.25 percentage point increase in the base interest rate) at the Monetary Policy Committee meeting scheduled for the 24th has increased.

On the same day, Seo made these remarks to reporters at a policy forum jointly hosted by the National Economic Advisory Council and the Korean Finance Association at the Korea Chamber of Commerce and Industry in Jung-gu, Seoul, under the theme "The Impact of Domestic and Foreign Interest Rate Differentials on Our Economy and the Optimal Policy Mix." Seo explained, "We raised the interest rate by 50 basis points (1bp = 0.01 percentage point) last October, and at that time, we paid attention to external financial stability, but now we need to pay more attention to domestic financial stability."

Regarding the Bank of Korea's final base interest rate level, Seo said that the 3.5% level previously announced by Governor Lee Chang-yong is still maintained. He said, "The U.S. has not adjusted its final interest rate yet. We need to reassess the outlook in November, but under the current circumstances, a reasonable expectation is around 3.5%, plus or minus."

Seo, who is classified as a 'hawk' (preferring tightening) in the Monetary Policy Committee, said in his presentation that "it seems inevitable that the interest rate differential between Korea and the U.S. will widen to some extent." He added, "With the U.S. tightening further, not only the conflicting relationships among economic growth, inflation, and financial stability in monetary policy operations but also the conflicting relationships between external financial stability (exchange rate) and domestic financial stability (interest rate) have intensified. We need to look at the situation flexibly and find the necessary policy mix. We are considering such a mix."

Currently, the gap between the U.S. base interest rate (3.75?4.00%) and Korea's base interest rate (3.00%) has widened to 1 percentage point, making a rate hike by the Bank of Korea inevitable. However, a rapid increase in rates could worsen domestic capital market tightening and other issues.

In this regard, Seo stated, "To maintain domestic and external balance, macro policies should be operated flexibly, while micro policies such as improving foreign exchange supply and demand conditions and stabilizing credit market supply and demand should be implemented simultaneously." For example, to respond to price increases caused by a sharp rise in the exchange rate, a continued tightening stance is necessary, whereas if domestic credit tightening leads to concerns about economic slowdown, a relaxation of the tightening stance is needed.

Seo emphasized that the Bank of Korea's recent role as a market maker, such as purchasing repurchase agreements (RPs) to stabilize the financial market, does not contradict the existing monetary tightening stance. He said, "Through open market operations, the total liquidity is maintained, but liquidity redistribution is used to prevent excessive tightening in some financial markets," adding, "however, caution is needed regarding risks such as excessive quasi-fiscal roles and moral hazard issues during the liquidity redistribution process."

Furthermore, he said there is a need to maintain objective and transparent principles regarding micro policies in the foreign exchange and financial markets. Seo pointed out, "The goal of stabilizing the foreign exchange market is not the exchange rate level but the reduction of exchange rate volatility," explaining, "because an increase in exchange rate volatility raises uncertainty in economic forecasts, which in turn increases negative impacts on the real economy."

In the medium to long term, it is necessary to seek a comprehensive policy framework that can respond to external shocks for small open economies like Korea by referring to recent economic policy frameworks announced by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). According to the Bank of Korea, the policy frameworks of the IMF and BIS combine various policies such as monetary policy, foreign exchange market policy, micro and macroprudential policies, and capital flow management measures to promote macroeconomic and financial stability.

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