The Zhitong Finance App learned that Bank of Korea Governor Shin Hyun-song said that a further appreciation of the Korean won is desirable because the Korean won has appreciated sharply since the Bank of Korea switched to a tight monetary policy, which is increasing household purchasing power. Shin Hyun-song said at the International Monetary Fund (IMF) and World Bank annual meetings in Bangkok on Tuesday: “We will maintain our restrictive monetary policy stance until we are convinced that inflation will approach the target level in a timely manner.”
The strengthening of the Korean won mitigates “K-type” differentiation, making policy trade-offs less difficult
Shin Hyun-song said that the strengthening of the Korean won has tilted the economic balance towards the domestic sector, helping to ease the polarization in what he called the “K-type economy.” He added that inflation, exchange rates, and financial stability all point in the same policy direction, which makes the trade-offs faced by the Bank of Korea easier to handle than normal circumstances.
This statement comes before the Bank of Korea's policy decision was announced on October 22. Previously, the Bank of Korea raised interest rates by 25 basis points in a row in July and August, raising the benchmark interest rate to 3%. Shin Hyun-sung has previously hinted that further austerity will be gradual, as policymakers need to assess the impact of rising borrowing costs.
Shin Hyun-song also said that the Bank of Korea will evaluate its six-month interest rate bitmap after accumulating at least one year of experience. The bitmap was launched in February during the tenure of former Governor Lee Chang-yong. He didn't give a timeline and said any assessments would take place next year or later.
Shin Hyun-song said that these predictions help convey the ideas of policy makers. In August, the Bank of Korea used these predictions to raise interest rates while showing the extent of its monetary policy response. He believes this has had a positive impact on long-term returns. However, policy guidance still needs to be flexible in order to respond to new information.
Shin Hyun-song said, “We are trying to find the best balance between too much and too little forward-looking guidance.”
The AI boom is intertwined with the Middle East war, and inflation may continue to be above target levels
This flexibility may be important as the Bank of Korea policymakers are dealing with several conflicting forces affecting the economic outlook. Shin Hyun-song said that the AI boom is offsetting the drag brought about by the Middle East war, but the combination of these two forces is increasing inflation. Stronger demand has increased the cost pressure brought about by the conflict, making overall inflation and core inflation likely to remain above the Bank of Korea's 2% target for some time.
On Tuesday, the IMF raised South Korea's economic growth forecast to 3.3% this year, 0.7 percentage points higher than the July forecast, because increased demand in the semiconductor industry offset the negative effects of the war. This is in line with the Bank of Korea's latest forecast. The Bank of Korea raised its 2026 growth forecast sharply from 2.6% to 3.3% in August. The IMF also raised its 2027 growth forecast to 2.8%.
South Korea's exports more than doubled year-on-year in September, reaching a record $120.9 billion, of which semiconductor shipments surged 263%. Inflation has slowed to 2.9% from 3.1% in August, but is still above the Bank of Korea's target.
Shin Hyun-song worked for the Bank of International Settlements (BIS) for more than ten years before taking charge of the Bank of Korea. He said that austerity policies should also reduce the accumulation of financial vulnerability. The Bank of Korea's financial vulnerability index is rising, but he doesn't expect its peak to be alarming.