Bank of Korea Governor Shin Hyun-song defended preemptive policy action when asked about the side effects of forward guidance, which signals the path of rate increases in advance. Flagging a rate hike pushes up market rates ahead of the decision, he said, but that burden costs the economy less than raising rates belatedly under market pressure.
Shin made the remarks on the 12th at a parliamentary audit held by the National Assembly's Finance, Economy and Planning Committee at the BOK headquarters in Jung-gu, Seoul, responding to a question from Rep. Moon Jin-seok of the Democratic Party of Korea, who had pointed to the side effects of forward guidance. "By raising rates in August, we moved ahead of the U.S. increase in September and bought ourselves time," Shin said. "I believe that carries a far smaller economic cost than being forced by the market to raise rates defensively at a later stage."
Shin said the shift toward higher rates had already been largely priced in by the market from May and June, and that yields on Korean treasury bonds had stabilized over the past two to three weeks relative to sovereign yields in major economies. The point, he said, was that moving early and signaling the move in advance gave the market time to absorb the policy change.
On prices, he projected that inflation would stay above the 2% target for a considerable period. "With the pass-through of accumulated cost pressures continuing and demand-side pressure gradually building, inflation will keep running above the target level for a considerable time," Shin said. On top of cost pressure from higher global oil prices, improving income conditions could feed into demand-side inflation, he said, making it necessary to manage core inflation preemptively.
As for the timing and pace of further increases, Shin said he would explain his thinking at this month's monetary policy meeting based on the relevant data. The BOK raised its base rate by 0.25 percentage point in both July and August, bringing it to 3.00%.