Bank of Korea Governor Hyun Song Shin (신현송) strongly signalled the possibility of raising the benchmark interest rate. With inflation pressure persisting and growth holding up better than expected, he judged that the need for monetary tightening has increased.

Shin said at a press briefing held after the Monetary Policy Board meeting on May 28 that he judged there would be a need to raise the benchmark rate at an appropriate time ahead. The board kept the policy rate unchanged at 2.50 percent per year.

He said inflation is expected to remain above the target level for a considerable period and the growth trend continues to improve. He said the timing and pace of any rate increase would be decided after a comprehensive review of inflation, the economy and conditions for financial stability.

In particular, Shin assessed the current economic situation by saying the need to raise the benchmark rate has become clear across inflation, growth, the exchange rate and real estate.

He said monetary policy is often difficult when multiple goals conflict, but that the direction is relatively clear now.

On the background to a minority opinion for a rate hike at this meeting, he said there was no big difference in how members viewed the situation and there was a technical difference in judgement over the timing of a response. He added that it reflected an opinion that additional indicators related to core inflation need to be checked further.

He avoided making specific comments on the terminal policy rate level.

Shin said it was not yet known whether the terminal rate would be 3.5 percent or higher or lower. He said he would judge while looking at data going forward.

The central bank raised its forecast for this year's economic growth to 2.6 percent from 2.0 percent. Shin assessed that the semiconductor cycle and expanding IT exports are leading the improvement in growth.

On the exchange rate, he said the biggest factor behind weakness in the won is the Middle East situation and there is a possibility the won could strengthen if conditions there stabilise. He stressed he would respond firmly to one-sided moves in the exchange rate.