The Vice Governor of the Bank of Korea expressed a hawkish stance before stepping down: Rising wages in the semiconductor industry have become a new driver of inflation, and the likelihood of further interest rate hikes is "very high."

As the remaining term approaches its last week, Lee Sang-tae, Senior Deputy Governor of the Bank of Korea, stated on Tuesday that unless there is an extreme shock, there is a "high" possibility that the central bank will further raise the benchmark interest rate. He specifically pointed out that as the semiconductor industry expands, rising wages in the information technology sector are translating into persistent upward price pressures. Lee made the above remarks during a press briefing at the Bank of Korea headquarters in Seoul's Jung-gu, as his three-year term as a member of the Monetary Policy Committee is set to end on August 20. On that day, he clearly stated that the current core drive pushing prices up has shifted from external supply shocks to domestic demand. "Whats concerning is that the wage increases in the IT sector are becoming a source of price pressure," Lee said, "While the magnitude of the price increase may not be large, its persistence will be very strong." This suggests that the consumer price index is unlikely to easily shift back below the central bank's 2% target for a prolonged period. Lee explained that while earlier inflation was driven primarily by supply-side shocks, such as international oil prices, the current boom in South Korea's semiconductor exports is driving income growth, which in turn is expanding consumption demand, creating a new cycle of price increases. He emphasized that compared to inflation driven by demand, the central bank is less concerned about supply shocks that may arise from geopolitical conflicts in the Middle East, as the recovery in domestic demand itself will generate gradual but sustained price pressures. This assessment is supported by the latest data. South Korea's overall inflation rate fell to 2.8% in July, the lowest in three months, but the core inflation rate rose slightly to 2.6%, indicating that the underlying price momentum excluding energy and food has not dissipated. The GDP grew 0.6% quarter-on-quarter in the second quarter, exceeding market expectations, while seasonally adjusted July exports surged nearly 70% year-on-year, reflecting strong demand for chips driven by the global AI boom, which continues to prop up 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 first tightening move in three and a half years and signaling that the door remains open for further actions. At the time, Bank of Korea Governor Rhee Chang-yong stated that upcoming meetings would involve "live discussions" and that no options would be excluded. Presently, most market participants are focused on the next monetary policy meeting on August 27, where the likelihood of consecutive interest rate hikes is still generally factored into expectations. Regarding whether rates should be increased again at the meeting this month, Lee revealed his decision-making thought process. "If I were to attend the August meeting, I would carefully examine trade data and credit card spending performance, and I would make judgments considering the Bank's updated outlook on economic growth and prices." He emphasized that since monetary policy must have a forward-looking and preventive characteristic, it is necessary for policymakers to take further action after reviewing the growth and inflation outlook. In discussing the impact of exchange rate and financial market volatility, Lee stated that these factors are not the main considerations in interest rate decisions, but the recent stabilization of the won and fluctuations in the stock market provide the Monetary Policy Committee with more comfortable decision-making space. "Increased volatility in the stock market and a tendency for the exchange rate to stabilize allow committee members to relax a bit psychologically," he said, "But from a traditional perspective, neither is a decisive factor. The real key is whether economic growth can be sustained." He pointed out that the committee is more focused on whether core inflation will remain high, whether economic momentum can continue, and issues related to financial stability. Regarding the won's performance, Lee commented that although the dollar-to-won exchange rate has receded from earlier highs to around 1410 won, this level is still "very high," continuously posing upward risks to prices by driving up import costs. He anticipates that due to certain short-term factors, the won-to-dollar exchange rate will not fall sharply, but in the broader trend, the won is expected to strengthen further. Supporting factors include a record trade surplus and a current account surplus, as well as market expectations for a narrowing interest rate differential between South Korea and the U.S. He believes that over time, these fundamental forces will increasingly dominate the foreign exchange market.