BOK Chief Rejects Automatic Rate Hikes

Bank of Korea Governor Shin Hyun-song stated that his country would not automatically follow US interest-rate moves, emphasizing the importance of setting monetary policy based on domestic economic and financial conditions. He made this remark during a press conference at the Jackson Hole Economic Policy Symposium in Wyoming on August 28.

Shin noted that the central bank does not have to mechanically follow the US just because it raises rates, instead focusing on financial stability in Korea and its policy objectives. He interpreted Federal Reserve Chair Kevin Warsh's speech as a strong signal of a possible rate increase in September due to inflation remaining above target for 65 months.

The Governor also expressed support for the 'quiet Fed' theory, which suggests that central banks should limit their guidance to allow markets to interpret economic information independently. He added that Korea's version of the dot plot, known as the K-dot plot, would be decided after a one-year evaluation period.

Shin warned of growing financial-system vulnerabilities in Korea due to rising property prices and a sharp increase in household debt. The Financial Vulnerability Index (FVI) has recently risen to around its long-term average of 46.5 and is likely to exceed that level by the time the central bank releases its September report.

The Governor used Korean farming tools, hoe and shovel, to illustrate the difference between inflation and financial stability, emphasizing the importance of preemptive action. He stated that inflation can be brought under control later, even at the cost of an economic slowdown, whereas financial vulnerabilities cannot be addressed once they erupt.