Bank of Korea’s Minutes Show Wider Support for Hawkish Shift

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(Bloomberg) — South Korea’s central bank was already leaning toward higher rates at its May meeting, even with some policymakers who voted to keep borrowing costs unchanged arguing that inflation risks were starting to outweigh the costs of tighter policy.

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Minutes released Tuesday showed that several Bank of Korea board members signaled that the debate was shifting toward when, rather than if, policy should be tightened as inflation and financial stability risks mounted. That was on top of two who called for an immediate quarter-percentage-point rate hike.

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The minutes help explain Governor Shin Hyun Song’s more hawkish stance following the late-May rate decision. In a speech marking the central bank’s anniversary last week, Shin said policymakers should raise rates “before it is too late,” arguing that inflation, growth and financial-stability concerns were all pointing in the same direction.

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The account of the meeting also underscores how dramatically the policy landscape has shifted since the outbreak of the Iran war for an economy heavily dependent on Middle Eastern oil. The BOK is now likely to join other global central banks in tightening policy, even as the US and Iran have reached a deal to reopen the Strait of Hormuz and move closer toward ending the war.

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Earlier Tuesday, the Bank of Japan voted to raise interest rates to the highest level since 1995, citing risks that inflation could exceed its 2% target.

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Read: BOJ Raises Rate to 31-Year High and Hits Normalization Milestone

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At its May 28 meeting, the BOK left the benchmark interest rate unchanged at 2.5% in a split decision, with the board’s six-month dot plot showing projections for higher borrowing costs. The central bank also raised its growth and inflation forecasts, reflecting stronger-than-expected momentum from the country’s semiconductor sector and the impact of elevated oil prices stemming from the conflict in the Middle East.

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One of the dissenting members argued that growth would likely exceed potential this year and next despite uncertainty surrounding the war, while inflation pressures from oil prices and a weak won were continuing to build. The member said a quarter-percentage-point increase would help contain inflation and prevent expectations from becoming entrenched.

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Another member said strength in the semiconductor sector was more than offsetting the drag from the Middle East conflict and warned that government efforts to contain prices were merely postponing, rather than eliminating, underlying inflation pressures.

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Even among members who voted to keep rates unchanged, some indicated that the case for tighter policy was strengthening. One said the risks associated with leaving rates unchanged had become greater than the risks of slowing growth through tighter policy, while another argued that the balance of risks facing the economy was shifting away from growth and toward inflation.

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Several policymakers also pointed to mounting financial-stability risks, including rising home prices in the Seoul metropolitan area, household debt and persistent volatility in the won. Members noted that foreign selling of domestic equities had contributed to keeping the currency weak despite strong export performance.