"Better to Fix It with a Hoe Before It Becomes a Rake"... Monetary Policy Board Moves to Curb Inflation Before It Spikes, Marking a Full Shift Into Tightening

[Financial News] The Bank of Korea's Monetary Policy Board has opted for tightening again. The move reflects a preemptive response to upward pressure on prices. This is the fourth time the board has raised the base rate in consecutive meetings. 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 set the base rate at 3.00% per year. After raising it by 0.25 percentage point the previous month, it delivered another increase of the same size just one month later. As a result, the freeze that had lasted for 14 months since the base rate was cut to 2.50% in May last year has ended, and the country has now entered a full tightening cycle.
There had been considerable market support for keeping the base rate unchanged. However, the board placed greater weight on bringing inflation under control early. At a press briefing that day, Hyun Song Shin emphasized preemptive tightening, even using the expression, "Better to fix it with a hoe before it becomes a rake."
Shin explained, "Preemptive monetary policy action 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 breaks with the usual practice of raising rates in two consecutive moves, we sent a strong signal to the market."
In other words, if tightening is postponed and the response comes too late, the economy as a whole will have to pay a heavier price.
In fact, the inflation forecasts for this year and next were unchanged from the May outlook, at 2.7% and 2.3%, respectively. By contrast, core inflation, which the BOK places greater emphasis on and excludes food and energy, was revised up to 2.5% for both this year and next, from 2.4% and 2.3%. On a half-year basis, the projections were also raised, from 2.4% to 2.6% and from 2.2% to 2.4%. Inflation expectations have also remained in the 2.7% to 2.8% range.
Another factor considered by the board was the stabilization of the won–dollar exchange rate. More specifically, it aimed to curb the rise in import prices caused by a weaker won and prevent those increases from feeding into domestic inflation. Shin noted that although the exchange rate had recently fallen into the 1,300-won range, it was still "high by historical standards" and said that, given the pace of import price increases, it should be addressed preemptively.
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. Next year's forecast was also lifted by 0.7 percentage point to 2.9%, reinforcing expectations that the semiconductor export boom will last longer.
[email protected] Kim Tae-il Reporter