“There is absolutely no need to align with the United States when determining policy rates. The exchange rate is not even a consideration.”

Shin Sung-hwan, a member of the Monetary Policy Committee, met with reporters in Jackson Hole, Wyoming, U.S. on the 23rd and said this about the Bank of Korea’s decision to freeze interest rates while the U.S. has made a September rate cut a fait accompli. Shin, who is attending the Jackson Hole symposium as a representative of the Bank of Korea, said, “(The Monetary Policy Committee meeting on the 22nd) was very difficult.”

He evaluated, “Considering the overall economy and prices, it should be lowered, but we could not ignore the rise in real estate prices.” He emphasized, “Whether housing prices stabilize has a significant impact on household disposable income, so it is a factor that the Bank of Korea can consider when determining interest rates.” He said that the Bank of Korea's priority is to consider the stability of financial markets along with price stability.

This is in line with what Bank of Korea Governor Lee Chang-yong said at a press conference immediately following the Monetary Policy Committee meeting, “When looking only at prices, conditions for a base rate cut have been created,” but “there are many warning signs of rising real estate prices and household debt.”

Commissioner Shin emphasized that it is natural for the Bank of Korea to give priority to evaluating the overall economic situation in its monetary policy decisions rather than the movements of other central banks, such as the United States.

If the Bank of Korea freezes the interest rate at 3.50% and the U.S. lowers the interest rate from the current 5.25-5.50% to 5.00-5.25% or 4.75-5.00% at the Federal Open Market Committee (FOMC) next month, the interest rate gap between Korea and the U.S. will narrow from 1.75-2.00% to 1.5-1.75% or 1.25-1.5%.

Regarding the reason why the exchange rate is not a consideration, Commissioner Shin pointed out that “the interest rate differential between Korea and the U.S. is no longer a significant factor in the exchange rate.” He added that in the past, the Korean government’s foreign exchange reserves were a factor that foreign investors would consider, but now our economy is not affected by that factor. He explained that “the exchange rate is now more affected by the movement of the value of the dollar itself,” and that “the Bank of Korea’s policy rate decision does not have much of an effect on the exchange rate.”

The exchange rate on the day of the Monetary Policy Committee meeting started at 1,333.60 won per dollar, then fell and rebounded to 1,339 won at the time of the announcement of the rate freeze. This is interpreted as a dovish reception, such as the change of the word “tightening” from “sufficiently maintaining” to “maintaining.” However, after it was revealed that everyone agreed to the rate freeze without a minority opinion, the exchange rate fell to 1,334.70 won at around 3:30 p.m. that day, and is currently trading at 1,324.70 won as of 6:00 a.m. on the 25th.

Jackson Hole = Special Correspondent Lee Sang-eun selee@hankyung.com