April Rate Hold Decision MPC Members, 5 Indicate Possible Future Hikes... Uncertainty Remains

Financial Instability Due to US SVB Bankruptcy
Need to Consider Ripple Effects of Interest Rate Hikes

At the Monetary Policy Committee (MPC) meeting on the 11th of last month, the members of the Bank of Korea unanimously decided to keep the base interest rate unchanged. However, among the seven MPC members, five mentioned that the possibility of further interest rate hikes should remain open.

According to the minutes of the MPC meeting released on the Bank of Korea's website on the afternoon of the 2nd, a majority of the MPC members decided to hold the base interest rate steady, citing domestic and international financial instability following the collapse of the U.S. Silicon Valley Bank (SVB), economic slowdown, and a decline in inflation rates. Nonetheless, regarding future interest rate decisions, they viewed that since inflation remains significant and uncertainties surrounding prices persist, the possibility of additional rate hikes should be kept open.

One MPC member stated, "Inflation is still high, and there is considerable uncertainty about the pace of its decline, so a prolonged tightening stance should be maintained until price stability can be assured." The member added, "However, given that financial stability risks have also increased both domestically and internationally, it is necessary to carefully manage policy by monitoring the ripple effects of interest rate hikes, key economic indicators, and developments in financial instability factors."

Another MPC member mentioned, "Regarding future interest rate decisions, from the inflation perspective, we need to consider the pace of decline in core inflation and the possibility that the tightening stance of advanced economies' central banks, including the U.S. Federal Reserve (Fed), has not yet ended." The member explained that U.S. core prices have not significantly decreased from the second half of last year, and in the Eurozone, they have even continued to rise. Therefore, it is necessary to observe the effects of the Fed's decisions, foreign investor capital flows, current account trends, and the interaction of market expectations on exchange rates and import prices. Additionally, the member argued that the appropriateness of the disinflation pace itself should be assessed, and since the tightening stance of monetary policy has been in place for nearly two years, the possibility of continued tightening for some time should be considered alongside monitoring the soundness of financial institutions.

Another member also said, "Considering domestic and international economic conditions, it is appropriate this time to keep the base interest rate at the current level of 3.5% and observe how the effects of the sustained tightening impact the economy." The member judged that "it is desirable to decide on further tightening while monitoring future growth and inflation trajectories, as well as domestic and international financial market conditions."

Another member who supported the decision to hold rates steady noted, "Following the recent U.S. SVB collapse, credit caution toward financial institutions has increased, and financial institutions are likely to respond more risk-aversely." The member added, "The financial stability situation can provide a turning point for changes in the monetary policy stance."

Some other members explained the reasons for holding rates, stating, "At this Monetary Policy Meeting, we must consider that sensitivity in the financial sector and risks to financial stability have increased after the SVB incident, and that the pace and magnitude of the Fed's rate hikes are expected to be lower than anticipated at the February meeting, which has reduced exchange rate volatility and foreign exchange sector risks." However, this member added that since the consumer price inflation rate has remained above the price stability target for a prolonged period and core prices still show rigidity, the tightening stance of monetary policy should continue. They emphasized the need to monitor the pace of inflation slowdown and changes in major countries' monetary policies, and consider additional base rate hikes if necessary.

Finally, one member said, "Given that downside risks to economic growth remain significant, inflation is showing signs of slowing, and latent risks related to financial instability persist, the base interest rate should be held steady this time as well." The member added, "It is necessary to review the effects of past rate hikes and the developments in the domestic and international economy."

[Image source=Yonhap News]

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