Bank of Korea governor sees continued restrictive policy as inflation stays above target

Bank of Korea governor Shin Hyun Song said monetary policy would remain restrictive as the central bank seeks to contain persistent inflation. Speaking at the IMF and World Bank annual meetings in Bangkok on October 13, he said headline and core inflation were expected to stay above target for some time, Reuters reports through CNA.

Shin identified two sources of price pressure: rising energy costs associated with the Middle East war and strong demand linked to the artificial-intelligence cycle. South Korea is a major participant in that industry, and he said the AI cycle more than outweighs the war’s negative effect on the country’s economic activity.

The relationship is different for inflation. Shin said the pressures from energy costs and AI-related demand combine. A stronger source of activity can support the economy while also adding to demand and price pressure, rather than cancelling the inflation associated with the energy shock.

South Korea’s annual consumer inflation rate eased to 2.9% in September. It nevertheless remained above the central bank’s 2% target, providing the price backdrop for Shin’s call to maintain a restrictive stance.

Headline inflation measures the overall price change covered by the indicator. Core inflation removes specified volatile categories to help assess broader pressure. Shin’s concern covered both, rather than treating a lower headline rate as the end of the inflation problem.

The Bank of Korea’s interest rate is currently 3.00%, following consecutive increases in July and August. Restrictive policy is intended to curb demand and price pressure through financial conditions, including the cost of borrowing.

President Lee Jae Myung said earlier on October 13 that a near-term increase was almost certain. He said South Korea needed to narrow a widening gap with United States rates and align with global monetary tightening.

Shin’s comments on the recent increases were more limited to their effect. Speaking to reporters after the Bangkok session, he said the consecutive moves had produced desirable results. He declined to comment on whether another increase would follow at the bank’s October 22 policy review.