Bank of Korea (BOK) Governor Hyun Song Shin assessed first-quarter nominal gross domestic product (GDP) growth of 10.5% as an exceptional expansion in a speech marking the central bank's 76th anniversary, pointing to the potential for revenue gains, domestic demand recovery, and exchange rate stabilization. At the same time, he reaffirmed the future monetary policy path, stating that "we need to raise interest rates without delay, focusing on price stability."
In his anniversary address Thursday, Shin said, "First-quarter nominal growth recorded an exceptional expansion of 10.5%," adding that "as terms of trade improved rapidly due to rising semiconductor prices, gross domestic income (GDI) and gross national income (GNI) also showed growth rates approaching double digits."
Given that the Bank of Korea has typically assessed economic conditions with a focus on real growth rates, his repeated emphasis on nominal GDP is seen as unusual. The remarks are interpreted as conveying that the semiconductor export boom has boosted corporate profits, which in turn leads to revenue gains, expanded investment, and rising incomes, potentially forming the basis for a future domestic demand recovery.
Indeed, Shin forecast that "domestic demand will also recover through revenue gains, income improvements, and expanded investment driven by nominal GDP growth, sustaining solid growth." While current consumption indicators do not show a strong recovery, the assessment appears to rest on the judgment that semiconductor-led income growth could feed into consumption and investment with a time lag.
He presented the same logic regarding the exchange rate. Shin said, "We expect the won-dollar exchange rate to gradually stabilize going forward, as the large current account surplus acts as a factor increasing won demand through corporate tax payments and expanded domestic investment."
This means that won demand could rise as export companies bring dollars earned overseas back into the country to pay corporate taxes or use them for domestic facility investment. The comments are interpreted as the backdrop for his reference to the potential for future exchange rate stabilization, even as the won-dollar rate has recently held at a high level in the 1,500-won range.
The market views this anniversary address as also reaffirming the future monetary policy path on the basis of confidence in growth. After raising risks on the price and financial stability fronts, Shin said, "At this point, conflicts among policy variables are not significant," adding that "we need to raise interest rates without delay, focusing on price stability."
This is interpreted to mean that growth, prices, and financial stability all support the need for tightening. While the Bank of Korea has signaled the possibility of further rate hikes over the past several months, the anniversary address is assessed as having presented this in clearer terms. In effect, it once again confirmed the future direction of monetary policy to market participants and economic actors.
Meanwhile, the level of warning over financial stability also heightened. Citing the rise in housing prices in the Seoul metropolitan area along with increasing "debt-fueled investment" in the stock market, Shin warned that "excessive leveraged investment can amplify market volatility during price corrections."
