Market attention is focused on the 9th, a day before the final Monetary Policy Board (MPB) meeting chaired by Bank of Korea Governor Lee Chang-yong. Although the probability of holding the base rate steady is high at this meeting, the market is watching whether, amid inflation concerns stemming from the war, he will deliver a hawkish (monetary tightening) message.

Shin Hyun-Song, the nominee to take the baton as Bank of Korea governor, stated that “for now, the likelihood of stagflation (price increases amid economic recession) is not high.”

The Bank of Korea will convene the board on the 10th to decide the base rate. Given the still significant uncertainty from the war, the market expects the bank to keep the base rate at 2.5% for the seventh consecutive time.

What the market is focused on is the direction Governor Lee will present. With the war-driven rise in oil prices showing signs of pushing inflation higher, the global monetary policy mood that had tilted toward rate cuts within the year has flipped toward hikes. This reflects the view that central banks will pivot to rate increases to contain inflation expectations.

Last month, the Bank of England (BOE) deleted references to rate cuts from its policy statement and mentioned the need for a tighter stance if the war is prolonged. In minutes of the March Federal Open Market Committee (FOMC) released that day, Federal Reserve (FED) members judged that upside risks to inflation had increased and voiced the view that both cuts and hikes should remain on the table.

The domestic picture is similar. Consumer price inflation last month was 2.2% year-on-year, up 0.2 percentage points from February (2%). This reflected a 9.9% increase in petroleum product prices. As prices show signs of rising, government bond yields are factoring in one to two base rate hikes within the year.

For this reason, some in the market expect Governor Lee to make hawkish remarks in light of inflation. Kim Ji-Na, an analyst at Eugene Investment & Securities, said, “Even though it is the final meeting, inflationary pressure from the war is a fact, so the governor's comments are bound to be hawkish.”

There are also calls for a preemptive rate hike, since a high exchange rate would amplify the energy shock. Ha Geon-Hyung, an analyst at Shinhan Investment, said, “It is urgent to demonstrate to the market, via a preemptive rate increase, policy resolve regarding heightened exchange rate volatility.”

However, there is also pushback that a rate hike within the year would be premature given government price policy and other factors. A bond dealer said, “Because this is the final board meeting for Governor Lee, he is likely to take a neutral stance rather than state a particular view,” adding, “As the government has already rolled out price stabilization measures, the level of prices is unlikely to warrant a rate hike within the year.”

At this stage, the nominee is showing a ‘cautious’ stance on responding through monetary policy.

According to written responses that Bank of Korea governor nominee Shin Hyun-Song submitted to the office of lawmaker Cha Gyu-Geun of the Choguk Innovation Party, Shin stated, “Although the upside pressure on prices and the downside pressure on growth have increased due to the war, at present the likelihood of stagflation (price increases, economic contraction)) is not high,” and, “It is not desirable to respond to a temporary supply shock with monetary policy.”

He said, “It is true that upward pressure on prices and downward pressure on growth have increased due to energy price rises and supply disruptions from the Middle East war,” while adding, “An improvement in the semiconductor cycle and the government supplementary budget will partially mitigate the shock.”

That said, if the war becomes prolonged, changes in monetary policy would be unavoidable.

Shin stated, “If the shock persists for a long period, its impact on prices and growth will become larger, so it is necessary to consider a response.”