Bank of Korea Deputy Governor Yoo Sang-dae speaks at a press conference held at a hotel in Samarkand, Uzbekistan, on the 3rd (local time). [Photo = Bank of Korea]

Deputy Governor Yoo Sang-dae's remarks on interest rate hikes are shaking up expectations for the May Monetary Policy Committee meeting.

At a press conference held in Samarkand, Uzbekistan, on the 3rd (local time), Deputy Governor Yoo stated, "It's time to consider pausing interest rate cuts and moving towards hikes." When asked if signals indicating a possibility of a rate hike in May could emerge from the Monetary Policy Committee meeting, he replied, "The possibility remains open."

The Deputy Governor of the Bank of Korea is an ex officio member of the Monetary Policy Committee. This makes it difficult for the market to dismiss these remarks as merely personal opinions. Notably, the Bank of Korea's next monetary policy decision meeting is scheduled for the 28th.

Deputy Governor Yoo's statement is interpreted as a strong signal ahead of the May 28th Monetary Policy Committee meeting, aimed at dampening market expectations for interest rate cuts.

So, will the Bank of Korea actually raise its benchmark interest rate? Currently, the likelihood is not high. A more realistic option is a "strong freeze," where the benchmark rate remains unchanged, but the language of the monetary policy and future rate outlook is adjusted hawkishly.

This approach aims to convey the message to the market that "immediate rate cuts cannot be expected" while keeping the interest rate the same.

There are reasons why Deputy Governor Yoo could talk about halting rate cuts.

The first-quarter growth figures for this year were stronger than expected. According to the Bank of Korea's preliminary data, real gross domestic product (GDP) in the first quarter of 2026 grew by 1.7% quarter-on-quarter and 3.6% year-on-year. Exports, driven by semiconductors, and facility investment supported this growth.

Based solely on these numbers, the case for a rate cut has indeed weakened.

However, a rebound in growth alone is not a sufficient condition for an interest rate hike. The current growth is closer to export- and semiconductor-led growth rather than an overheating economy with broad-based domestic demand recovery.

There is weak evidence to suggest that consumption has strongly revived and is pushing up prices.

The key lies in the nature of the price increases.

The primary drivers pushing up prices now are oil prices and exchange rates, rather than increased consumption. The conflict in the Middle East is stimulating international oil prices, and the high won-dollar exchange rate is increasing the burden of import prices.

In its April Monetary Policy Committee meeting, the Bank of Korea held the benchmark interest rate at 2.50%, explaining that both upward pressure on prices due to the Middle East conflict and downward pressure on growth have increased. This implies that the price increases are closer to external shocks rather than being driven by excessive consumption.

Consumer sentiment indicators also point in the same direction.

According to the Bank of Korea's Consumer Survey for April 2026, the Consumer Sentiment Index stood at 99.2, a decrease of 7.8 points from the previous month.

When consumer sentiment falls below the baseline of 100, the argument that interest rates should be raised because consumption is driving up prices needs to be handled with caution.

This is where the limitations of interest rate hikes become apparent.

Raising interest rates by the Bank of Korea will not lower international oil prices. Adjusting the benchmark interest rate will not stop the conflict in the Middle East.

While exchange rates can be partially defended through interest rates, the Bank of Korea cannot fully control US interest rates, dollar strength, geopolitical risks, or foreign capital flows.

Ultimately, an interest rate hike is less of a prescription to eliminate the root causes of inflation and more of a defensive measure to slow down the speed at which external shocks spread to domestic prices and financial markets.

The problem is that the domestic private sector bears the cost of this defense first. Higher interest rates increase the burden of household loan interest payments, financial costs for self-employed individuals, and funding pressure for highly indebted companies.

For this reason, the base scenario for the May 28th Monetary Policy Committee meeting is reasonably considered to be a "strong freeze" rather than an interest rate hike.

The Bank of Korea can suppress market expectations for rate cuts by hawkishly altering monetary policy language or by upwardly adjusting the future rate outlook of Monetary Policy Committee members, without raising rates.

This is a compromise that avoids the shock of an actual rate hike while signaling vigilance on inflation and exchange rates.

The conditions under which an interest rate hike could become a reality are different.

These include the won-dollar exchange rate re-settling above 1500 won, international oil prices rising further, and consumer prices and inflation expectations significantly exceeding forecasts. In such cases, the Bank of Korea may consider a rate hike to defend prices and the exchange rate.

However, even in such a scenario, the hike would be more of an emergency defense rather than a response to an overheating economy.

Conversely, if oil prices and exchange rates stabilize and inflation indicators remain within expected ranges, the likelihood of an actual rate hike will decrease further.

From a central bank's perspective, if it can manage the market through communication, there is little reason to deploy the costly option of an actual rate hike prematurely. Deputy Governor Yoo's remarks, viewed in this context, are more of a warning to curb expectations for rate cuts than an announcement of an actual hike.

The political schedule is also a sensitive factor. While there is no basis to conclude that the Bank of Korea spoke with the local elections in mind, the fact that this Monetary Policy Committee meeting is held the day before early voting for the June 3rd local elections is a burden.

If the possibility of a rate hike becomes official language at the tail end of election campaigning, issues of household loan interest burdens, self-employed individuals' interest costs, and weakened domestic demand could become central campaign issues. The timing of the Monetary Policy Committee meeting just before early voting amplifies the impact of the remarks.

In conclusion, the question for the May 28th Monetary Policy Committee meeting is less about "Will rates rise?" and more about "How strongly will they be frozen?"

Deputy Governor Yoo Sang-dae's remarks are read as a signal to curb market expectations for rate cuts.

If the key variables driving up prices are oil prices and exchange rates, rather than consumption, actual rate hikes will inevitably be cautious.

This is because central bank pronouncements can act as signals to the market, but they can also translate into increased financial costs for households and self-employed individuals.