SEOUL: South Korea’s central bank governor nominee Shin Hyun Song says the policy rate is broadly neutral based on a wide array of estimates, signalling no urgent need for a sharp shift in monetary policy.
In a written response to queries from lawmaker Chun Haram, Shin said the benchmark rate of 2.5% sits around the midpoint of estimates for South Korea’s neutral rate, based on a range of studies conducted within and outside the Bank of Korea (BoK).
He added that such estimates are subject to considerable uncertainty and should be assessed alongside broader financial conditions and policy effects.
The remarks suggest the incoming governor may take a measured approach to policy even as inflation risks rise and global uncertainty intensifies.
Markets had speculated that Shin, a former Bank for International Settlements official, could lean towards a more hawkish stance given concerns over household debt and asset prices.
Shin’s response to Chun, the Reform Party’s floor leader, came ahead of his parliamentary hearing tomorrow.
Shin was appointed last month by President Lee Jae Myung as the BoK’s next governor, and he’s expected to take office after governor Rhee Chang Yong’s four-year term concludes next week.
The BoK last Friday kept its policy rate unchanged for a seventh straight meeting since July last year. The central bank said it’s premature to respond with policy adjustments given uncertainty surrounding the war in Iran.
If the shock proves temporary, the board will refrain from adjusting rates, but if it becomes persistent, a policy response may be warranted.
On the currency, Shin said recent weakness in the won has been driven mainly by external factors, including rising oil prices and heightened risk aversion linked to tensions in the Middle East.
He added that heavy foreign selling of local equities, partly reflecting portfolio rebalancing after strong gains in South Korean stocks, has added to downward pressure on the won.
He contrasted the recent moves with the sharp depreciation seen late last year, which was driven more by domestic factors such as outbound investment flows by residents, and uncertainties related to overseas investment.
Shin also pointed to South Korea’s high dependence on energy imports, noting that surging oil prices tend to worsen the nation’s terms of trade and amplify pressure on the currency.
On market stabilisation, Shin said an expansion of currency hedging by the National Pension Service could help ease imbalances in the foreign-exchange market during periods of elevated volatility.
He added that diversifying funding sources for overseas investment, including through foreign currency bond issuance, could reduce demand for US dollars and help limit upward pressure on the exchange rate.
Shin stressed that monetary policy should be assessed in a broader context, noting the considerable uncertainty surrounding neutral rate estimates. He said policymakers should take into account overall financial conditions. — Bloomberg
