The Bank of Korea: "Inflation Rate Will Rise to Around 2% for the Time Being"

FOMC Holds Base Interest Rate at 0.50% for 11 Consecutive Months

Lee Ju-yeol, Governor of the Bank of Korea, is attending the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul on the morning of the 15th.

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea forecasted that this year's gross domestic product (GDP) growth rate will exceed the February projection of 3.0%, supported by a recovery in exports and facility investment. The consumer price inflation rate is expected to fluctuate around 2% for the time being. While anticipating a rapid economic recovery and inflation reaching 2%, the base interest rate was kept unchanged. This is due to the high uncertainty regarding the progression of COVID-19.

On the 15th, the Monetary Policy Board of the Bank of Korea held a monetary policy meeting at the Bank's headquarters in Jung-gu, Seoul, and decided to maintain the base interest rate at around 0.50% per annum. Since lowering the base rate to a record low in May last year, the Monetary Policy Board has kept it unchanged for seven consecutive times (11 months).

In the monetary policy decision statement, the Monetary Policy Board stated, "This year's growth rate is expected to exceed the level projected in February (3.0%). Exports have continued to perform well, facility investment has maintained a steady recovery, and private consumption has eased its sluggishness, leading to a somewhat expanded recovery in the domestic economy." Regarding employment, it also evaluated that "there were some signs of improvement, such as a turnaround in the number of employed persons." Previously, the International Monetary Fund (IMF, 3.6%), the Organisation for Economic Co-operation and Development (OECD, 3.3%), and the government (3.2%) all forecasted growth in the 3% range.

The rapid rebound in growth is influenced by the U.S. economy's recovery, supported by continuous monetary easing and rapid vaccination. Since the Korean economy has a high export ratio, it is greatly affected by the global economy. However, it remains to be seen how much the domestic economy will revive. While there are forecasts that pent-up consumption sentiment is boosting the domestic economy, contrasting views exist due to Korea's low vaccination rate of 2.3% and slow employment recovery, suggesting a slow internal economic recovery. The Bank of Korea also raised its inflation forecast on this day. The Monetary Policy Board stated, "Going forward, the consumer price inflation rate is expected to exceed the February projection path, fluctuating around 2% for the time being before somewhat declining." In February, the Bank had projected this year's inflation rate at 1.3%, indicating it will be higher than that.

Despite the rapid rise in growth and inflation and the surge in household debt amid prolonged ultra-low interest rates, it is difficult to raise interest rates hastily. Increasing the burden on existing borrowers could rather hamper economic recovery. The Monetary Policy Board said, "Although the domestic economic recovery is expected to gradually expand, uncertainty remains high, and demand-side inflationary pressures are not expected to be significant," adding, "We will maintain a monetary easing stance." It further stated, "We will closely monitor the progression of COVID-19, the effects of policy responses, and pay attention to changes in financial stability, such as capital flows into asset markets and the accumulation of household debt."

This content was produced with the assistance of AI translation services.