BOK’s Rhee Signals Third Rate-Hike Warning as Market Sees Two Increases This Year

Rhee Chang-yong, governor of the Bank of Korea, said interest rates need to rise without delay with a focus on price stability, effectively signaling a July increase in the benchmark rate. Since his first Monetary Policy Board meeting after taking office on May 28, Rhee has directly raised the need for higher rates three times in about two weeks.

Rhee made the remarks in an anniversary speech on June 12 at the BOK’s annex building in Seoul, marking the central bank’s 76th anniversary. Growth, inflation and financial stability are pointing fairly clearly in one direction for monetary policy, he said.

He first directly raised the possibility of a rate increase at a press briefing after the May 28 policy meeting. Looking at inflation, growth, the exchange rate and property prices, the path ahead is clear, he said, adding that the central bank would raise the benchmark rate to manage those factors consistently. At a BOK international conference on June 1, he delivered another hawkish message, saying there were fewer obstacles to adjusting monetary policy to respond to inflation and more room to operate policy effectively. In the June 12 anniversary speech, he went further and addressed the pace of tightening, saying rates needed to be raised without delay. The remarks effectively pointed to a July increase in the benchmark rate to 2.75% from 2.50%.

Rhee’s repeated emphasis on the need to move quickly appears tied to simultaneous increases in growth and inflation. He said nominal growth posted an unusual 10.5% expansion as semiconductor prices climbed. The domestic economy is expected to maintain solid growth as the chip upcycle continues, with stronger tax revenue from nominal GDP growth, improved income and increased investment helping domestic demand recover.

He also voiced strong concern about inflation. Supply shocks are spreading more broadly and demand-side price pressures are also building, meaning inflation will stay above target for a considerable period, Rhee said. He added that if normalization of energy supply chains is delayed, elevated household inflation expectations and the possibility of corporate price increases could add further pressure.

Rhee also cited financial-stability risks. In the Seoul metropolitan housing market, home-sale prices as well as jeonse and monthly rental costs are continuing to rise sharply, while expectations for further gains have increased again, he said. He also pointed to a sharp increase in debt-fueled investing as stock prices surged.

The exchange rate is another concern. The won has closed above 1,500 per dollar for 19 straight trading sessions since May 15. Still, Rhee said foreign-exchange volatility could ease after ceasefire negotiations in the Middle East made significant progress overnight. Markets see the current-account surplus as a factor that will gradually stabilize the won by boosting demand for the Korean currency through corporate tax payments and increased domestic investment, he said.

If that happens, it would reaffirm that exchange rates are shaped not only by momentum but also by underlying value, he added.

Rhee also addressed concerns that monetary tightening could weigh on lower-income households by increasing debt-servicing burdens. Because inflation hurts lower-income groups relatively more, preemptive efforts to stabilize prices are a way to prevent that burden from worsening, he said. While higher rates inevitably raise debt-servicing costs for companies and households, targeted support would be handled more effectively through fiscal policy, he added.

Markets expect the BOK to raise rates twice this year even if negotiations over the Middle East war are concluded soon. Lim Jae-kyun, head of the bond and credit team at KB Securities, said two hikes are virtually a done deal as the odds of an upward revision to economic growth have increased. If the blockade of the Strait of Hormuz is lifted and oil prices fall, however, concerns about additional tightening next year could ease, he added. Kong Dong-rak, head of long-term strategy research at Daishin Securities, also said the odds remain high for two increases this year even if a ceasefire is reached, given sticky inflation, solid growth, and financial-stability concerns tied to property prices and the exchange rate.

Despite Rhee’s third signal of a benchmark-rate increase, South Korean government bond yields fell. In Seoul’s bond market on June 12, the yield on the three-year government bond fell 5.5 basis points from the previous session to 3.808%. The move came as expectations for an end to the Middle East war rose sharply and oil prices declined. Lim said the three-year yield could fall into the 3.7% range if ceasefire talks are concluded.

Shim Seong-mi, Korea Economic Daily reporter smshim@hankyung.com