BOK chief says inflation key to further rate hike decisions

Bank of Korea (BOK) Governor Shin Hyun-song said Monday that inflation trends would be the most important factor in determining the direction of interest rates, as lawmakers questioned whether the central bank would raise its benchmark rate again in October or November.

Shin made the remarks during a parliamentary audit by the National Assembly‘s Finance, Economy and Planning Committee at the BOK headquarters in central Seoul.

Asked by Rep. Yoon Hu-duk of the ruling Democratic Party whether the central bank was considering another rate increase this month or next, Shin emphasized the importance of monitoring inflation.

“The most important criterion in determining the direction of interest rates is the inflation trend,” he said.

Shin acknowledged that monetary tightening could impose a disproportionate burden on financially vulnerable households.

“What the Bank of Korea is particularly concerned about is that when prices rise, vulnerable groups such as low-income households suffer the most,” he said.

He added that financially vulnerable borrowers were also experiencing considerable hardship as a result of the central bank‘s interest rate increases.

Shin said addressing these challenges would require cooperation with the government and the use of additional policy support measures.

The governor also provided estimates of the economic impact of the government‘s proposed budget for next year.

According to Shin, the 2027 budget proposal is expected to add approximately 0.5 percentage point to South Korea‘s gross domestic product growth, while increasing inflation by an estimated 0.06 percentage point.

Responding to concerns that expansionary fiscal policy could further fuel inflation, Shin said the extent of any additional upward pressure on prices required closer examination.

However, he suggested that an estimated increase of 0.06 percentage point in inflation could be considered relatively modest.

Shin also addressed concerns about a potential policy mismatch between the government‘s expansionary fiscal stance and the central bank’s monetary tightening.

Rep. Lee Jong-wook of the opposition People Power Party questioned whether the government‘s increased spending and the BOK’s interest rate hikes were working at cross-purposes.

“We are using analytical models to determine whether the two policies are actually out of sync,” Shin said.

He acknowledged that expansionary fiscal policy could place additional pressure on inflation and money supply in the short term.

Nevertheless, Shin maintained that fiscal expansion and monetary tightening would not necessarily be contradictory if government spending helped raise South Korea‘s potential growth rate over the medium to long term.