Bank of Korea Deputy Governor to step down before leaving office: rising wages in the semiconductor industry are a new driver of inflation, and the possibility of further interest rate hikes is “very high”

The Zhitong Finance App learned that with only one week left in his term, Bank of Korea Senior Vice Governor Yoo Sang-dae said on Tuesday that unless there is an extreme impact, it is “very likely” that the central bank will raise the benchmark interest rate further. In particular, he pointed out that with the expansion of the semiconductor boom, wage increases in the information technology industry are turning into long-lasting upward pressure on prices.

Yoo Sang-dae made the above statement at a press conference held at the Bank of Korea headquarters in Jung-gu, Seoul. His three-year term as a member of the Financial and Monetary Commission will end on August 20. On the same day, he made it clear that the current core driving up prices has shifted from external supply shocks to domestic demand.

“What is worrisome is that rising wages in the IT sector are becoming a source of pressure to rise in prices,” Yoo Sang-dae said. “The price increase may not be significant, but it will be very sustainable.” This means that it is difficult to change the situation where the consumer price index is above the central bank's 2% target for a long period of time.

Ryu Sang-dae explained that in the past, the main factors that triggered inflation were supply-side shocks such as international oil prices, but now, South Korea's semiconductor export boom is driving revenue growth, thereby expanding consumer demand and forming a new cycle of rising prices. He stressed that compared with demand-driven inflation, the central bank is less concerned about possible supply shocks such as the Middle East geopolitical conflict, because the recovery in domestic demand itself will cause gradual but continuous price pressure.

This judgment is supported by the latest data. South Korea's overall inflation rate fell back to 2.8% in July, the lowest in three months, but the core inflation rate rose slightly to 2.6%, indicating that the underlying price momentum did not subside after excluding energy and food. GDP grew 0.6% month-on-month in the second quarter, exceeding market expectations, while exports surged nearly 70% year over year after workday adjustment in July, indicating that demand for chips driven by the global boom in artificial intelligence (AI) is still strongly driving this trade-dependent economy.

Just last month, the Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75%. This is the first time the central bank has turned to austerity after a lapse of three and a half years, and suggests that the door will remain open. Central Bank Governor Shin Hyun-song said at the time that the next few meetings will be “live discussions,” and no options are ruled out. Currently, most market participants have set their sights on the next interest rate meeting on August 27, and the possibility of continuous interest rate hikes is still generally taken into account in expectations.

As to whether interest rates should be raised again at this month's meeting, Yoo Sang-dae revealed his decision-making ideas. “If I attend the August conference, I will carefully review export customs data and credit card consumption performance, and at the same time make a judgment based on the central bank's updated economic growth and price outlook.” He stressed that since monetary policy must be forward-looking and preventative, it is necessary for policymakers to take further steps after reviewing growth and inflation prospects.

When discussing the impact of exchange rate and financial market fluctuations, Yoo Sang-dae said that these factors are not the main considerations in interest rate decisions, but the recent stabilization of the Korean won exchange rate and stock market shocks have provided the Monetary Policy Committee with a more relaxed decision-making space. “The stock market is becoming more volatile and the exchange rate is stabilizing, which allows the members of the committee to relax a bit mentally,” he said. “However, from a traditional perspective, the two are not decisive factors. What really matters is whether economic growth can be sustained.” He pointed out that the committee is paying more attention to the issues of whether core inflation will remain high, whether economic momentum can continue, and financial stability.

Regarding the trend of the Korean won, Yoo Sang-dae commented that although the exchange rate of the US dollar against the Korean won has fallen from its previous high to around 1,410 won, this level is still “very high”, which continues to pose an upward risk to prices by driving up import costs. He expects that due to some short-term factors, the exchange rate of the won against the US dollar will not fall rapidly, but judging from the general trend, the won is expected to strengthen further. The supporting factors include record trade surpluses and current account surpluses, as well as market expectations that the Korea-US spread will narrow. He believes that with the passage of time, these fundamental forces will increasingly dominate the foreign exchange market.