[Editorial] The BOK’s Rate-Hike Signal: Price Stability Must Always Come First

On the 28th, the BOK’s Monetary Policy Board held its first monetary policy meeting since Hyun-Song Shin took office and left the benchmark rate unchanged at 2.50% per year. However, Hyun Song Shin, who chairs the board, said, "I believe it will be necessary to raise the benchmark rate at an appropriate time in the future."
Hyun Song Shin, who is widely seen as a hawk favoring a tougher monetary stance, said, "The need to raise the benchmark rate has become clear in every respect, including inflation, growth, exchange rates and the housing market." On the same day, the BOK raised its growth forecast for this year from 2.0% to 2.6%, while lifting its consumer inflation forecast from 2.2% to 2.7%.
The BOK’s primary policy mandate is to manage inflation. If it fails to respond to inflation in time, the damage to the economy could be severe. The current global economy, amid the ongoing Arab-Israeli conflict, is facing both high inflation and sluggish growth. Although South Korea posted the highest growth rate among major economies in the first quarter of this year, that was largely due to a boom in semiconductors alone. Other sectors remain stuck in recession.
With the economy still weak outside the semiconductor sector, it would be burdensome to raise rates and pursue tighter policy. The government’s economic team would likely not welcome it either. Even so, making price stability the broader macroeconomic priority is desirable, as it would strengthen the economy’s fundamentals and lay the groundwork for sustainable growth.
Moreover, not all of the liquidity injected into the market during the COVID-19 pandemic has been withdrawn. Money is also flowing into the stock market, creating a liquidity-driven rally. Despite various government measures, the real estate market has shown little sign of cooling and continues to run hot. As Hyun Song Shin said, the direction of interest rates should be determined by inflation and liquidity, rather than by the business cycle alone.
To put it another way, the stock and real estate markets have now moved beyond overheating and into territory where a bubble must be a concern. If policy does not shift toward tightening, the situation could become dangerous. We have already seen what happens when an economy’s peak overheating, in the form of a bubble, suddenly bursts.
The semiconductor boom has created a kind of optical illusion, making the economy look stronger than it really is and pushing stock prices sharply higher in a short period. Of course, the semiconductor upturn driven by strong exports may continue for some time. But the cycle could eventually turn downward. If preparations are not made in advance, it will be too late.
It is never easy to pursue the conflicting goals of growth and price stability at the same time. Even so, the priority must be inflation. The Arab-Israeli conflict is not over yet, and even if it ends now, the aftereffects of high oil prices will continue to weigh on the Korean economy into next year. In response, the government will likely pursue fiscal expansion by injecting more money into the economy.
Under Hyun-Song Shin, the BOK should not simply adopt monetary policy that runs counter to the government’s fiscal policy. Rather, it should take a broad view of the national economy and pursue a well-balanced policy mix. Above all, curbing inflation must always remain the top priority.