"Use a hoe before a rake" ... Monetary Policy Board moves to curb inflation before it spikes, signaling a full-fledged tightening cycle

[Financial News] The Bank of Korea's Monetary Policy Board has opted for back-to-back tightening. The move is aimed at responding ahead of time to upward pressure on prices. This is the fourth consecutive rate hike by the board. The BOK also signaled its intention to bring the won–dollar exchange rate into a stable range quickly.
At its policy-setting meeting on the 27th, the Monetary Policy Board of the Bank of Korea decided to keep the benchmark interest rate at 3.00% a year. After raising it by 0.25 percentage point last month, it delivered another increase of the same size just one month later in a back-to-back move. As a result, the freeze that had lasted for 14 months since the rate was cut to 2.50% in May last year has ended, marking the start of a full tightening cycle.
There had been considerable support in the market for keeping rates unchanged. Still, the board placed greater weight on bringing inflation under control early. At a press briefing that day, Governor Hyun Song Shin stressed preemptive tightening, even using the expression, "Use a hoe before a rake."
Shin explained, "A preemptive monetary policy response can stabilize inflation expectations sooner than a delayed response, reducing the intensity and duration of tightening and ultimately minimizing the cost to growth." He added, "By taking a step that departs from the usual practice of two consecutive hikes, we sent a strong signal to the market."
The message was that delaying tightening and moving too late would impose a greater cost on the economy as a whole.
The outlook for consumer price inflation this year and next was unchanged from the May forecast, at 2.7% and 2.3%, respectively. By contrast, the forecast for core inflation, which the BOK places greater emphasis on and which excludes food and energy, was raised to 2.5% for both this year and next, from 2.4% and 2.3%. On a half-year basis, the projections were also revised up, to 2.6% from 2.4% and to 2.4% from 2.2%. Inflation expectations have also remained in the 2.7% to 2.8% range.
Stabilizing the won–dollar exchange rate on a downward path was another factor considered by the board. More specifically, it sought to curb the rise in import prices caused by a weaker won and prevent that from feeding into domestic inflation. Shin noted that although the exchange rate has recently fallen to the 1,300 won range, it remains "high by historical standards" and said it should be addressed preemptively in light of import price increases.
Economic growth also eased concerns about the unavoidable side effects of tightening, including damage to vulnerable borrowers. The BOK raised its forecast for this year's economic growth to 3.3%, up 0.7 percentage point from the 2.6% projected in May. Its forecast for next year was also lifted by 0.8 percentage point to 2.9%, reinforcing expectations that the semiconductor export boom will last longer.
[email protected] Kim Tae-il Reporter