BOK Deputy Governor Sees Further Hikes as Core Inflation Holds at 2.6%

The Bank of Korea is likely to lift its policy rate again at the Aug. 27 meeting, outgoing Deputy Governor Ryoo Sangdai said, as core inflation holding at 2.6 percent and stronger-than-expected growth keep the tightening bias intact.

"If there is no particular shock or special factor, the possibility of further rate hikes can be considered high," Ryoo, senior deputy governor at the Bank of Korea, said at a press briefing Tuesday.

The central bank raised its benchmark rate by 25 basis points to 2.75 percent in July, its first increase in three and a half years. July consumer prices rose 2.8 percent from a year earlier, while core inflation climbed to 2.6 percent. Second-quarter gross domestic product expanded 0.6 percent quarter on quarter, beating expectations, and workday-adjusted exports surged nearly 70 percent in July.

A second consecutive hike would push the policy rate toward the 3.5 percent peak reached after the Russia-Ukraine war, a level held from January 2023 to October 2024. Ryoo, whose term ends Aug. 20, will not attend the decision, but his comments reinforce the base case among some economists that the board will tighten again, a move that could weigh on the KOSPI while supporting the won.

Ryoo said the timing and pace of any additional hikes would hinge on the central bank's updated economic outlook, which the research bureau begins preparing this week, alongside high-frequency indicators such as customs export data and credit-card spending that track private consumption. "The decision to raise rates in July was based on growth momentum being stronger than initially expected and the outlook that inflation would remain above target," he said. "This trend was reaffirmed in the most recent second-quarter GDP and July inflation data."

Demand-Driven Pressures Keep Core Inflation Sticky

Ryoo drew a contrast with the post-Russia-Ukraine episode, when supply-side shocks from war and post-COVID price increases drove inflation far higher. "This time, I do not expect inflation to go that high, but the current pressures are largely demand-driven as the economy recovers, meaning there is substantial concern that core inflation could rise gradually but persistently," he said. The longer inflation stays above the 2 percent target, the stronger the knock-on effects through expectations and wage growth, he added.

The current tightening cycle is unusual in its income backdrop. The current account posted a surplus of $191 billion in the first half, 1.6 times last year's full-year figure of $123.1 billion, as improved terms of trade from semiconductor-led exports expanded nominal GDP. Ryoo expects that income growth to spill over into domestic consumption and investment, adding to demand-side price pressure.

Won Seen Strengthening as Fundamentals Reassert

The won, which weakened toward 1,600 per dollar in June before recovering to about 1,410, is likely to drift lower gradually, Ryoo said. Short-term supply-and-demand factors and sentiment drove much of the currency's recent swings, he said, but with the Bank of Korea raising rates and expectations building that the domestic-foreign interest-rate gap will narrow, fundamental drivers such as the current-account surplus should gain weight. "Since supply-and-demand and sentiment effects still linger, I don't expect a rapid decline," he said. "But if I have to pick a direction, I see it heading lower."

Ryoo also backed the internationalization of the won, arguing that surging foreign and outbound investment against limited market depth leaves the currency vulnerable to volatility. He called for faster rollout of infrastructure such as a 24-hour market and an offshore won payment system, and praised the "K dot plot" — introduced in February, letting each of the seven board members signal their rate outlook six months out — as constructive for communication.

Ryoo, who joined the Bank of Korea in 1986 and returned as deputy governor in 2023, steps down Aug. 20, a week before the next policy meeting. His tenure spanned the Taeyoung Construction project-financing crisis, the yen carry-trade turmoil of August 2024, and the Middle East war that began in March. "Things were so hectic, I barely noticed time passing by," he said.

This article is for informational purposes only and does not constitute investment advice.