BOK chief signals rate hikes as inflation, debt risks mount

Bank of Korea (BOK) Gov. Shin Hyun-song strongly signaled the need to increase the interest rate “before it's too late” to control inflation in a speech marking the central bank's 76th anniversary on Friday.

The remarks reinforced market expectations that the BOK could take a more hawkish stance as economic growth remains stronger than expected, while concerns grow over inflation and household debt.

Shin expressed a strong concern about inflation during the speech. The governor noted that consumer prices rose in the 3 percent range in May as higher oil prices, driven by the prolonged Iran War, fed through to the broader economy.

Economic data released since the Monetary Policy Board's May meeting have largely supported the central bank's existing assessment, he added.

Core inflation, which excludes volatile food and energy prices, also climbed to the mid-2 percent range.

"There is also a risk that elevated inflation expectations among households and the possibility of further price hikes by businesses could add to inflationary pressures," Shin said. He added that the inflation rate will stay above the BOK’s target.

Shin also pointed to rising household debt tied to the housing and stock markets as a growing source of financial risk. Household loans have begun rising as home prices continue to climb in the greater Seoul area and more retail investors borrow money to chase gains in the stock market, according to the BOK.

"Excessive leveraged investing can not only increase the impact on individual gains and losses when asset prices correct, but also increase volatility across the broader market," Shin warned.

“Despite rising stock prices and a large current-account surplus, the dollar-won exchange rate has remained elevated in the 1,500s level due to continued foreign outflows from Korean equities,” he added.

Still, the BOK expects the currency to gradually stabilize as the current-account surplus boosts demand for the won through corporate tax payments and increased domestic investment. Prolonged exchange rate volatility, however, could add to inflationary pressures by raising import costs, Shin warned.

Shin also identified the internationalization of the won as a key pillar of the central bank's efforts to modernize the foreign exchange market. Plans include extending the market to 24-hour trading and building offshore won-settlement infrastructure to make it easier for foreign investors to trade the currency.

The measures are also intended to draw offshore non-deliverable forward trading back into Korea and deepen liquidity in the domestic foreign exchange market, according to the BOK.

BY KIM DA-YOUNG  [[email protected]]