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Bank of Korea Governor Shin Hyun-song reiterated that an increase in the benchmark interest rate is necessary to stabilize prices. Shin explained that the burden on vulnerable groups from rising rates should be complemented through fiscal policy.
In a speech marking the central bank's 76th anniversary on the 12th, Shin said, "We need to raise interest rates without delay, with a focus on price stability." Since taking office, Shin has signaled his intent to raise the benchmark rate through various channels.
He added, "The burden of rising prices falls relatively more heavily on low-income groups," and "preemptive efforts to stabilize prices are also a way to prevent their burdens from intensifying." Indeed, with consumer prices rising into the 3% range in May and core inflation also climbing to the mid-2% level, the burden of managing prices is growing.
However, regarding the side effects that rate hikes would bring, he emphasized the role of fiscal policy. Shin said, "Raising interest rates inevitably increases the debt repayment burden on businesses and households," and "because monetary policy affects the market indiscriminately, selective support for these difficulties is more effective through fiscal policy."
This is interpreted to mean that even if the benchmark rate is raised for price stability, fiscal measures should provide more direct and selective support to low-income groups and small business owners who face growing burdens in the process.
He projected that the exchange rate would gradually stabilize. "As large surpluses in the current account act as a factor increasing demand for the won through corporate tax payments and expanded domestic investment, the won-dollar exchange rate is also expected to gradually stabilize going forward," he said. "When this happens, we will be able to confirm once again that the exchange rate also has a fundamental value factor."
Shin continued, "Through 24-hour operation of the foreign exchange market and the establishment of an offshore won settlement system, we will work with relevant institutions to implement policies aimed at improving foreign investors' access to the won market and absorbing offshore non-deliverable forward (NDF) trading demand into the domestic market."
