Bank of Korea Governor Sees Need for Rate Hike Amid Inflation, Financial Risks

SEJONG, July 9 (Yonhap) -- The governor of the Bank of Korea (BOK) said Thursday he sees the need for a rate hike at an appropriate time, noting the central bank will consider various factors, including inflation hovering above target and other financial risks.

BOK Gov. Shin Hyun-song made the remark during a session at the National Assembly, also noting the South Korean economy is expected to maintain solid growth on the back of the semiconductor industry cycle and eased geopolitical tensions in the Middle East.

"I believe there needs to be a rate hike at an appropriate time," Shin said. "We need to consider factors such as inflation hovering above target, improved growth and extended risks for financial stability."

When asked by a lawmaker if he was referring to a big step, Shin said he was just offering a general background, without elaborating further. The Monetary Policy Board of the central bank is set to decide on the key rate next Thursday.

Shin added inflation is expected to remain elevated for a "considerable period" despite eased Middle East-related factors, as the impact of previous cost increases continues.

Touching on foreign exchange volatility, Shin said there is a chance the Korean won may strengthen against the dollar.

Shin added the recent decline of the Korean won against the greenback came amid market expectations of changes in U.S. monetary policy, along with foreign investors' rebalancing of their portfolios in South Korea.

The governor added the country does not lack liquidity to utilize measures such as currency swaps.

"(Currency swaps) are a measure to supply liquidity when we run out of it," Shin said. "In the current situation, we do not lack liquidity."

Shin also said the recent sell-off by foreign investors is expected to ease later this year.

"Due to gains in South Korean stocks, foreigners are continuing to sell shares as they reduce their holdings," Shin said. "I believe the selling will ease somewhat in the second half of this year."

In a report submitted by the central bank to parliament, the BOK noted the possibility of the South Korean stock market entering a downward trend remains limited.

"Chipmakers' operating profit outlooks are continuing to be revised up. The government is also making efforts to improve capital market policies," it said.

The BOK is taking steps to come up with policy recommendations from a neutral and longer-term perspective, touching on structural issues, such as low births, aging demographics, balanced regional growth and climate change, Shin also said.