Bank of Korea officials are leaning hawkish, with recent statements increasing expectations for another rate increase in August.

According to Bloomberg, senior deputy governor Ryoo Sangdai, who is about to step down, stated on Tuesday that the central bank will likely need to raise interest rates further as sustained economic growth pushes up core inflation. He noted that while the recent stabilization of the Korean won and the retreat of the KOSPI index provide some room for monetary policy decisions, they are not the key factors determining the policy direction.

Ryoo indicated that the timing and pace of future rate hikes will depend on incoming data. The Bank of Korea's updated growth and inflation forecasts, to be released this month, will serve as an important basis for the August 27 policy meeting. He emphasized that monetary policy needs to be forward-looking, and as policymakers reassess the growth and inflation trajectory, further rate hikes remain on the table.

Stubborn Core Inflation Shifts Policy Focus to Persistence

South Korea's headline CPI rose 2.8% year-on-year in July, down from the previous month but still above the Bank of Korea's 2% inflation target. Core CPI, however, climbed to 2.6%, indicating that underlying price pressures remain strong.

Ryoo believes that the current inflation cycle is unlikely to repeat the sharp surge seen after the Russia-Ukraine conflict. However, the semiconductor industry boom is driving wage growth and domestic consumption expansion, which could keep inflation above the 2% target for a longer period. "The increases may not be very large," he said, "but they could be persistent."

He stated that current policy decisions need to focus more on whether core inflation can remain elevated, whether economic growth momentum can be sustained, and financial stability risks, rather than short-term market fluctuations.

Stronger-than-Expected Economic Growth Provides Support for Further Rate Hikes

South Korea's recent economic performance has exceeded expectations, providing support for the central bank to maintain its tightening stance.

The country's GDP grew 0.6% quarter-on-quarter in the second quarter, beating market forecasts. Adjusted for working days, exports surged nearly 70% year-on-year in July, with the semiconductor and other export sectors continuing to perform strongly.

The Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75% in July, its first rate hike since early 2023. Governor Rhee Chang-yong stated at the time that future policy meetings would remain "open" and all options were on the table.

Previously released meeting minutes also showed internal support for further rate hikes within the Bank of Korea. Ryoo said that if he is still in office this month, he will focus on the central bank's latest growth and inflation forecasts, combining them with high-frequency indicators such as trade data and credit card spending to determine the timing of the next rate hike.

Weak Won Remains a Risk for Imported Inflation

The exchange rate is another factor the Bank of Korea must consider as it continues to tighten policy.

Ryoo stated that although the Korean won has recently stabilized, it remains at a relatively weak level, which could continue to push up inflation through higher import costs.

However, he expects the won to gradually strengthen over the medium to long term. South Korea's record trade surplus and current account surplus, along with expectations of a further narrowing of the Korea-US interest rate differential, could be factors supporting the won.

Ryoo, who joined the Bank of Korea in 1986, will see his term expire on August 20, ahead of the August 27 policy meeting. With core inflation remaining elevated and economic growth performing strongly, some economists have already factored in another rate hike in August as their baseline forecast.