FOMC Member: "Interest Rate Hike Effects Seen Across Economy... Rate Freeze Is Appropriate"

"Need to Confirm Impact on Growth and Inflation"
February Monetary Policy Committee Minutes Released

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the regular Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the 23rd. Photo by Joint Press Corps

As the Monetary Policy Committee (MPC) of the Bank of Korea decided to keep the base interest rate unchanged on the 23rd of last month, the majority of MPC members expressed the view that maintaining the base rate at around 3.50% is appropriate. Considering that the effects of previous rate hikes have been observed across the economy, including growth, inflation, and finance, it is necessary to hold the base rate steady and monitor the development of domestic and international economic conditions going forward.

According to the minutes of the MPC meeting published on the Bank of Korea’s website on the afternoon of the 14th, one MPC member stated, "Going forward, inflation is expected to steadily ease, rising around 4% in the first half of this year and about 3% in the second half, as demand-side inflationary pressures ease and supply-side base effects come into play. Core inflation is also expected to gradually slow from the current low 4% range to the low 2% range by the end of the year."

This member added, "It is judged that the effects of previous rate hikes have been appearing across the economy, including growth, inflation, and finance, and considering that the transmission lag of monetary policy takes several quarters, these effects may be amplified in the future. In particular, as the domestic growth recovery and inflation slowdown are expected to strengthen in the second half of this year, it is desirable to keep the base rate unchanged this time."

Another member also supported the freeze, saying, "In a situation of high uncertainty like now, it is necessary to carefully assess the impact of previous rate hikes on growth and inflation."

Another member said, "Considering the continuous decline in housing prices, the slowdown in household credit growth, sluggish real investment, and the deceleration of employment and wage growth, it is judged that the effects of the tightening monetary policy are taking hold." He added, "Since the base rate has been raised by 3.0 percentage points over the past year and a half, the additional benefits obtainable at this stage are very small or uncertain. Rather, more attention should be paid to the possibility of excessively weakening economic resilience or increasing risks to financial stability." Furthermore, he noted, "It is also necessary to recall the experience of worsening distribution indicators during the recovery from the past foreign exchange crisis and the global financial crisis," expressing the opinion that maintaining the base rate is appropriate.

One member stated, "From August 2021 to January 2023, the base rate was raised 10 times, and for the first time since the global financial crisis, the base rate rose to a restrictive level exceeding the estimated range of the nominal neutral rate." He added, "At this stage, considering the transmission lag of monetary policy, it is time to review the effects of past policies and then consider additional hikes depending on the development of inflation and domestic and external uncertainty factors."

On the other hand, MPC member Jo Yoon-je expressed a minority opinion that it is appropriate to raise the base rate by 0.25 percentage points from 3.50% to 3.75%. Member Jo said, "A 0.25 percentage point hike may have some contractionary effect on the economy, but I believe it is a level that can be tolerated given the improvement in external conditions." He also predicted, "The slowdown in the contraction of the real estate market, which has been ongoing, has recently shown signs of easing, so it will not significantly hinder a soft landing."

He continued, "It will play a role in supporting the smooth continuation of household debt deleveraging, and above all, it will actively respond to the current uncertainties surrounding the inflation stabilization path, which the Bank of Korea must prioritize, ultimately reducing the long-term sustainability of inflation and lowering future policy response costs."

The majority of MPC members expressed the view that the possibility of further adjustments to monetary policy should remain open. One member emphasized, "We must firmly maintain a tightening stance until we are confident that inflation will converge to the target level, focusing on price stability. If the downward stabilization of inflation does not become visible, we must actively respond with additional rate hikes." Another member added, "We need to review the transmission effects of past rate hikes, inflation trajectory, risks to the economy and financial stability, and changes in major countries’ monetary policies to decide whether further rate adjustments are necessary."

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