Bank of Korea Deputy Governor turns hawkish before stepping down: Semiconductor industry wage increases become a new driver of inflation, probability of further rate hikes is “very high”

According to Zhitong Finance APP, with only one week left in office, Bank of Korea Senior Deputy Governor Ryu Sang-dae stated on Tuesday that unless there is an extreme shock, the probability of the central bank further raising the benchmark interest rate is "very high." He specifically noted that as the semiconductor boom expands, rising wages in the information technology sector are turning into lasting upward pressure on prices.

Ryu Sang-dae made these remarks at a press briefing held at the Bank of Korea headquarters in Jung-gu, Seoul. His three-year term as a member of the Monetary Policy Board will end on August 20. On that day, he made it clear that the main driving force pushing up prices has shifted from external supply shocks to domestic demand.

“What is concerning is that wage increases in the IT sector are becoming a source of upward pressure on prices,” Ryu Sang-dae stated. “The magnitude of price increases may not be large, but their persistence will be very strong.” This means that the situation where the consumer price index remains above the central bank's 2% target for an extended period will not be easily changed.

Ryu Sang-dae explained that previous drivers of inflation were mainly supply-side shocks such as international oil prices. Now, however, Korea's booming semiconductor exports are spurring income growth, which in turn boosts consumption demand, creating a new round of price escalation. He emphasized that compared to demand-driven inflation, the Bank of Korea is less concerned about supply shocks that may arise from factors like Middle East geopolitical conflicts because the recovery in domestic demand itself generates gradual yet persistent price pressures.

This judgment is supported by the latest data. Korea's overall inflation rate fell back to 2.8% in July, the lowest in three months. However, core inflation edged up slightly to 2.6%, indicating that base price momentum, excluding energy and food, has not abated. Gross Domestic Product (GDP) grew 0.6% quarter-on-quarter in Q2, exceeding market expectations, while export-adjusted for the number of working days soared by nearly 70% year-on-year in July, highlighting that the global artificial intelligence (AI) boom continues to strongly drive demand for chips in this trade-dependent economy.

Just last month, the Bank of Korea raised the benchmark interest rate by 25 basis points to 2.75%, marking the central bank’s first shift towards tightening in three and a half years and signaling that the door remains open for further hikes. At that time, Bank of Korea Governor Rhee Chang-yong declared that all upcoming meetings would involve "live discussions," with no options excluded. Currently, most market participants are turning their attention to the next monetary policy meeting scheduled for August 27, where another rate hike is widely anticipated.

When asked about whether to raise rates again at this month's meeting, Ryu Sang-dae revealed his decision-making approach: "If I were to attend the August meeting, I would carefully examine export customs clearance data and bank card consumption performance, while also considering the central bank’s updated economic growth and price outlook." He emphasized that since monetary policy must be forward-looking and preventive, after reviewing outlooks for growth and inflation, it may be necessary for policymakers to take further action.

Discussing the impact of exchange rates and financial market volatility, Ryu Sang-dae said these factors are not the main considerations for interest rate decisions. However, the recent stabilization of the Korean won and stock market fluctuations have given the Monetary Policy Board more room to make decisions calmly. “Stock market volatility has increased and the exchange rate has stabilized, allowing board members to be a little more relaxed psychologically,” he said. “But traditionally, these two are not decisive factors. The real key is whether economic growth can be sustained,” he noted. The Board places more importance on whether core inflation will remain high, whether economic momentum can continue, and issues of financial stability.

Regarding the Korean won’s performance, Ryu Sang-dae commented that although the USD/KRW exchange rate has declined from previous highs to around 1,410 won, this level is still “very high” and continues to pose upward risks to prices by pushing up import costs. He expects that due to some short-term factors, the won will not depreciate rapidly against the dollar. However, in the long term, the won is likely to strengthen further. Supporting factors include record trade surpluses and current account surpluses, as well as market expectations for a narrowing Korea-US interest rate gap. He believes that over time, these fundamentals will increasingly dominate the foreign exchange market.