The Bank of Korea's Monetary Policy Board raised concerns that expanded fiscal spending from the government's mega-project drive could heighten volatility in the bond market.
According to the minutes of the July 16 monetary policy direction meeting released by the BOK on the 4th, one board member, identified as Member A, said, "In the process of the government pursuing mega-projects such as semiconductors and data centers, spending could increase beyond initial expectations to expand essential infrastructure such as power and water." The member added, "Even if a significant portion of the related funding is covered by additional tax revenue, concerns over fiscal expansion could spill over into the bond market, so caution is needed."
With next year's budget projected to increase more than 10% from this year's original budget to exceed 800 trillion won for the first time, the concern was that additional government spending for mega-projects could lead to increased sovereign bond issuance, potentially driving bond yields sharply higher.
On inflation, board members forecast that while both upward and downward pressures exist simultaneously, prices would not return to the BOK's 2% inflation target for some time. In particular, some board members mentioned the need for additional rate hikes, saying this rate increase alone might not be sufficient to achieve the inflation target. Member B said, "Since this hike alone can hardly be seen as sufficient to achieve the inflation target, future base rate operation needs to proceed with hikes commensurate with the projected paths for growth and inflation."
Member C noted, "The possibility that inflation will not return to 2% for a considerable period is just as concerning as its short-term rise." The member added, "In particular, foreign consumption within the country has increased due to the rise in the exchange rate, and we need to examine how much upward price pressure this creates."
In response, the relevant department said, "The impact on prices from the increase in foreign consumption within the country and the decrease in domestic residents' overseas consumption is not yet significant, but it could act as a partial upward factor."
A question was also raised about how U.S. Federal Reserve Chair Kevin Warsh's efforts to overhaul the monetary policy operating framework might affect the communication policies of major central banks.
In response, the relevant department explained, "Chair Warsh may shift toward maintaining strategic ambiguity in communication." The department added, "In this case, communication between the Fed and the market could diminish, which could increase uncertainty in the policy environment surrounding major central banks."
