The Bank of Korea Monetary Policy Committee: "Need to Continue Interest Rate Hike Stance... Downside Risks to Economy Have Increased"

The Monetary Policy Committee Raises the Base Interest Rate by 0.25 Percentage Points

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 25th. (Photo by Bank of Korea)

The Monetary Policy Committee of the Bank of Korea emphasized on the 25th that it is necessary to continue policy responses to prevent the entrenchment of high inflation by raising the base interest rate by 0.25 percentage points. However, it also indicated the possibility of adjusting the pace of future rate hikes, citing increased downside risks to the economy and persistent high uncertainty in domestic and external conditions.

In the resolution of the monetary policy direction meeting held that morning, the committee stated, "Although downside risks to the domestic economy are increasing and high uncertainty in domestic and external conditions persists, it is necessary to maintain the stance of raising interest rates as inflation is expected to continue its high upward trend, significantly exceeding the target level."

The committee explained that while the rise in petroleum prices has somewhat slowed, the increase in prices of agricultural products and personal services has expanded, sustaining a high rise rate in the 6% range. It added that although the consumer price inflation rate may decrease due to the decline in international oil prices, the core inflation rate is expected to continue rising, maintaining a high level in the 5-6% range for a considerable period.

Accordingly, the Bank of Korea raised its consumer price inflation forecasts for this year and next year to 5.2% and 3.7%, respectively, significantly higher than the May forecasts (4.5% and 2.9%). This is the first time since the inflation targeting system was implemented in April 1998 that the Bank of Korea has set an inflation forecast above 5%.

However, the committee emphasized that downside risks to the economy have increased significantly, as much as inflation concerns.

The committee pointed out, "Going forward, the global economy and international financial markets are expected to be influenced by international commodity prices and global inflation trends, major countries' economic indicators and monetary policy changes, and geopolitical risks," adding, "the domestic economy continued to see consumption recovery, but downside risks to the economy have increased due to export slowdown amid weakening growth in major countries."

The committee adjusted this year’s and next year’s growth rates to 2.6% and 2.1%, respectively, below the May forecasts of 2.7% and 2.4%.

Meanwhile, the committee decided to end new support under the temporary Financial Intermediation Support Loan program, which has a fixed loan handling period for banks, on the 30th of next month.

The committee explained, "As the business conditions and financial situations of small business owners and self-employed persons are showing signs of recovery, an exit strategy for the emergency support measures introduced in response to COVID-19 is necessary," adding, "consistency with the monetary policy stance addressing high inflation through base rate hikes was also considered."

However, the committee plans to continue support until maturity for loans handled before the 30th of next month for some small business owners and self-employed persons, considering their difficulties, for up to one year. Regardless of future changes in the base interest rate, the loan interest rate for this program will remain at an annual 0.25%.

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