BOK chief signals tighter monetary policy stance, citing strong economy

Bank of Korea Governor Shin Hyun-song said Sunday that "all indicators are pointing in the same direction" and that the central bank can conduct monetary policy "with much more room to maneuver," speaking at the 2026 BOK International Conference held at the bank's annex.

During a policy dialogue with European Central Bank Executive Board member Isabel Schnabel, Shin said South Korea, like the euro area, is sensitive to energy price shocks, but stressed that the country's economic fundamentals remain strong. "Korea's growth is robust. First-quarter GDP rose 3.6 percent year-on-year, while gross domestic income grew 12.3 percent — that is an exceptionally high figure," he said.

He explained that when oil prices rise, terms of trade typically deteriorate and GDI growth slows relative to GDP, but said that this time the gains from the semiconductor sector outweighed the drag from higher energy prices. "We achieved this outcome on the back of strong exports," he said.

Shin said the conditions for a restrictive monetary policy stance are now in place. "There are fewer obstacles to adjusting monetary policy in relation to inflation," he said. The difficulty in conducting monetary policy usually lies in conflicting signals, he added, but the economy is strong and the output gap — the difference between actual and potential GDP — is expected to turn positive next year. "When you consider housing prices, household debt and the exchange rate, all indicators are pointing in the same direction," he said. "We can conduct monetary policy with much more room to maneuver."

The discussion also turned to won-denominated stablecoins. Shin told Schnabel that there is considerable interest in South Korea in won-denominated stablecoins, and asked why non-dollar stablecoins — including euro-denominated ones, which account for a very small share of the market — have struggled to gain traction. Schnabel said issuers such as Tether and Circle have grown large enough to benefit from network effects, making it difficult for other stablecoins to compete. She noted that Europe regulates the virtual asset market, including reserve and deposit requirements, which limits profit margins for issuers. "Ultimately, neutral regulation can provide significant momentum, and that is something that needs to be carefully considered," she said.

The Bank of Korea is holding the two-day 2026 BOK International Conference Sunday and Monday under the theme "Central Banks and the Future of Money." The event brings together the latest research and policy cases on topics including the link between financial stability and monetary policy, digital currency and payment innovation, communication strategies, the historical evolution of central banks, and AI technology.

In her keynote address on "Central Banks and the Future of Money," Schnabel said stablecoins promise efficiency gains in payments, but argued that much of that potential stems from the underlying technology rather than the instruments themselves. "The right response is to keep pace with technological innovation and define a framework within which private innovation can flourish," she said.

She added that the goal should be to ensure new forms of private money — such as stablecoins and tokenized deposits — complement rather than crowd out public money, with public money continuing to serve as the anchor settlement asset. "Whether stablecoins will carve out a place within the financial system the way money market funds did 50 years ago, or whether other innovations such as tokenized deposits will prove to be more promising alternatives, remains to be seen," she said.

Schnabel said innovation alone cannot guarantee lasting success. "Safeguards must be put in place to preserve financial stability, the transmission of monetary policy, and the international role of the euro," she said.

In a subsequent session, Tobias Adrian, financial counselor and director of the Monetary and Capital Markets Department at the IMF, presented on "Financial Vulnerabilities and Monetary Policy." He said changes in financial conditions affect not only average economic trends but also the risk of severe downturns. "Even if financial stability is not a direct policy objective of central banks, financial vulnerabilities must be factored into the conduct of monetary policy in order to reduce medium- to long-term volatility in prices and the output gap," he said.

Markus Brunnermeier, a professor at Princeton University, presented on "The Trilemma of Payments, Credit and Digital Currency," arguing that it is difficult for any digital currency system to simultaneously achieve all three core objectives: efficient payments, efficient credit supply and privacy protection. He recommended that policymakers take these trade-offs fully into account when designing frameworks for central bank digital currencies and other digital money initiatives.

Michael Weber, a professor at Purdue University and ESMT Berlin, addressed public perceptions of political bias at the Federal Reserve. Research shows that political perceptions of the Fed have a significant effect on macroeconomic expectations and trust, he said, warning that even if the Fed believes itself to be politically independent and communicates as such, perceptions of political bias among the general public can sharply undermine the effectiveness and credibility of monetary policy. He said the Fed should develop a communication strategy that emphasizes its nonpartisan character and conveys that it does not serve the interests of any particular group.