Shin Sung-hwan, a Bank of Korea (BOK) Monetary Policy Board member who completed his four-year term, said Tuesday that "it is quite burdensome to discuss rate cuts in the current situation." At his farewell press conference, he warned of upside inflation risks driven by surging international oil prices and repeatedly emphasized price stability as the central bank's top priority.
At the press conference held at the BOK headquarters that morning, Shin said, "Inflationary pressure remains significant, and uncertainty about future prices is very high." Regarding the possibility of a "shift to a rate-hike cycle" recently mentioned by Senior Deputy Governor Ryoo Sang-dae, he revealed a hawkish stance, saying he "interprets the situation as one with considerable inflation concerns." Earlier, at a press conference on the 3rd, Ryoo became the first Monetary Policy Board member to mention rate hikes, stating that "it is time to consider halting rate cuts and raising rates."
Shin pointed to oil prices as the key variable for future monetary policy. "We initially projected year-end oil prices at around $70, but they are now at $90 and could go even higher depending on circumstances," he said. "If high oil prices persist for a long time, producers will no longer be able to absorb costs and will pass them on to consumers, in which case the battle against inflation could become much more intense than expected." He also stressed that "in a situation where oil prices continue to surge, minimizing the secondary shock from high oil prices is extremely important, even if our economy has to endure tremendous pain."
Although Shin has been classified as a representative dove (preferring monetary easing) on the Monetary Policy Board, his assessment of the current situation was different. "Previously, I issued dissenting opinions for rate cuts because I thought upward price pressure was relatively low, but now the situation is completely different," he said. "If I had to make a decision now, I would have been much more concerned about inflation than before." Shin was the lone dissenter calling for rate cuts at the January, April, August, October, and November Monetary Policy Board meetings last year, when rates were held steady.
He expressed regret over the rate decision in August last year. "I have no regrets about my choices, but I do wish I had pushed more strongly for a rate cut at the point last August when we could have done so," Shin said. He added, however, that "since the Monetary Policy Board is a committee-based organization, I fully respect its decisions."
Shin cited polarization as his greatest concern during his term. "In a situation where a sector accounting for 10% of the economy (such as semiconductors) determines the entire headline numbers, the remaining 70 to 80 percent are still struggling," he said. "The extent to which growth puts pressure on prices may differ between textbooks and actual conditions, which made interpretation difficult." On the trickle-down effect from semiconductors, he drew a clear line, saying, "Semiconductors are a capital-intensive industry with limited impact on employment. Even if the semiconductor sector generates significant profits, I am not very concerned about the resulting inflation shock."
Regarding the recent rise in Korean Treasury bond yields, he mentioned concerns about fiscal-driven inflation. His analysis was that inflation pressure from fiscal conditions is being reflected in government bond yields not only in the United States but also in the domestic market. On the issue of the won's undervaluation, he said, "Even considering the Korea-U.S. interest rate inversion, the won is excessively undervalued," adding that this is "due to the rapid surge in overseas investment demand from domestic residents in a short period." However, he predicted that "considering various trends, the exchange rate will move toward downward stabilization going forward." Regarding moves to open financial markets, such as inclusion in the World Government Bond Index (WGBI) and the Morgan Stanley Capital International (MSCI) developed markets index, he emphasized, "The stronger the connections with international financial markets become, the more intense herd behavior can become," stressing that policy authorities must preemptively secure safety devices like "airbags and brakes."
He did not hold back on criticism regarding structural reform. Pointing to Korean households' high savings rate and sluggish private consumption, Shin said, "With the savings rate so high, the growth rate of private consumption is not at a satisfactory level even in the current environment of high growth." He advised that "we need to institutionally reform the inefficient system in which people struggle to buy homes and save only for retirement, leaving behind nothing but large assets (real estate), and build a structure in which people can live well before they pass on."
