Bank of Korea Governor Shin Hyun-sung stated on May 28 that "inflation, growth, exchange rates, and real estate are all pointing in the same direction," indicating the need for a rate hike at an appropriate time. His remarks suggest a clear intention to tighten monetary policy in the second half of the year.
After presiding over his first Monetary Policy Committee meeting, Shin noted that inflation is expected to remain above target for an extended period while growth continues to show solid improvement. He remarked, "Monetary policy can be challenging when multiple objectives conflict, but this time is an exception; the paths for inflation, growth, exchange rates, and real estate are clear."
The recently released dot plot revealed a hawkish sentiment among committee members, with 19 out of 21 projections indicating a rate above the current level of 2.50%. Shin emphasized the importance of three factors: when to raise rates, how quickly, and to what extent, suggesting that the dot plot might provide insights into these questions.
Market sentiment is leaning towards a July rate hike as a foregone conclusion. Based on Shin's comments, analysts suggest that consecutive increases in July and August are also feasible. Kim Sung-soo, a researcher at Hanwha Investment & Securities, stated, "The Bank of Korea is now in an environment where it can focus solely on price stability. The decision to hold rates steady this time was likely a move to provide guidance before a hike, making a July increase almost certain."
Baek Yoon-min, a researcher at Kyobo Securities, noted, "While we expected inflation to peak in the second half of the year, the ongoing conflict in the Middle East could keep international oil prices elevated for an extended period, impacting inflation. It is reasonable to anticipate two rate hikes within this year as a basic scenario."
Additionally, the Bank of Korea raised its economic growth forecast by 0.6 percentage points to 2.6%. Shin explained that while the Middle East conflict is expected to lower this year's growth rate by about 0.4 percentage points, stronger-than-expected semiconductor performance and increased IT exports could boost growth by 0.7 percentage points. He also noted that the government's supplementary budget and a booming stock market are expected to raise consumption and investment, contributing an additional 0.2 and 0.1 percentage points, respectively.
In its optimistic scenario for the semiconductor market, the Bank of Korea anticipates that semiconductor export volumes could expand to the mid-20% range this year and maintain a high level in the mid-10% range next year, potentially increasing domestic growth rates by 0.5 percentage points this year and 0.3 percentage points next year, pushing economic growth above 3%. Conversely, in a pessimistic scenario where semiconductor export volume growth slows to the mid-10% range this year, the growth rate is expected to decrease by 0.3 percentage points this year and 0.2 percentage points next year.
* This article has been translated by AI.
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