FOMC "Maintaining Current Tightening Stance... Core Inflation Slowing Slower Than Expected"

Bank of Korea Governor Lee Chang-yong is striking the gavel at the Monetary Policy Committee plenary meeting held on the morning of the 25th at the newly constructed Bank of Korea headquarters in Jung-gu, Seoul, completed after six years.
[Photo by Yonhap News]

The Monetary Policy Committee of the Bank of Korea explained on the 25th regarding the decision to keep the base interest rate steady at 3.5% per annum, stating, "Although the inflation rate is expected to continue its slowing trend, it is projected to exceed the target level for a considerable period, so maintaining the current tightening stance is deemed appropriate." They added, "The necessity for further rate hikes will be assessed while reviewing changes in domestic and international policy conditions."

In the monetary policy direction statement released that morning, the Bank of Korea's Monetary Policy Committee explained, "The domestic economy is expected to continue its low growth trend, but inflation is projected to exceed the target level for a considerable period, and given the high uncertainty in policy conditions, we will focus on price stability and maintain the tightening stance for a considerable period."

The committee maintained its 'low in the first half, high in the second half' outlook despite recent signs of domestic economic sluggishness.

The committee emphasized, "Domestic consumption showed a moderate recovery mainly in services, but growth slowdown continued due to weak exports and investment. Going forward, the domestic economy is expected to maintain a sluggish growth trend for some time, but from the second half of the year, it is anticipated to gradually recover due to easing IT sector downturn and the ripple effects of China's economic recovery."

This year’s consumer price inflation rate is expected to align with the February forecast (3.5%), but core inflation is anticipated to remain at a high level for a considerable period. The committee pointed out, "The pace of core inflation slowdown is expected to be more gradual than initially forecast due to accumulated cost pressures and strong service demand, and the inflation rate for this year is projected at 3.3%, exceeding the previous forecast (3.0%)."

The committee stated, "We will operate monetary policy with attention to financial stability while ensuring that inflation stabilizes at the target level over the medium term by monitoring growth trends." They added, "The necessity for further rate hikes will be carefully judged by closely examining the pace of inflation slowdown, downside risks to growth, financial stability risks, the effects of previous rate hikes, and changes in major countries' monetary policies."

Meanwhile, the committee kept the base interest rate at 3.5% and revised down this year’s real Gross Domestic Product (GDP) growth forecast from 1.6% to 1.4%. The consumer price inflation forecast remains unchanged at 3.5%.

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee plenary meeting held at the newly constructed Bank of Korea headquarters in Jung-gu, Seoul, completed after six years, on the 25th morning.
[Photo by Yonhap News]

Below is the full text of the Monetary Policy Direction Statement

The Monetary Policy Committee decided to maintain the Bank of Korea’s base interest rate at the current level (3.50%) until the next monetary policy direction decision, and operate monetary policy accordingly. Although the inflation rate is expected to continue its slowing trend, it is projected to exceed the target level for a considerable period, so maintaining the current tightening stance is deemed appropriate. The necessity for further rate hikes will be assessed while reviewing changes in domestic and international policy conditions.

The global economy is showing a better-than-expected growth trend, but growth is expected to gradually slow due to continued monetary tightening by major countries and reduced credit supply in the banking sector. Global inflation continues its slowing trend but remains at a high level, with core inflation declining relatively slowly. In international financial markets, the US dollar weakened amid signals of the end of the Federal Reserve’s rate hikes but fluctuated after mid-May due to stronger-than-expected economic indicators and US debt ceiling negotiations. Long-term government bond yields in major countries fluctuated within a narrow range before rising. Going forward, the global economy and international financial markets are expected to be influenced by the pace of global inflation slowdown, changes in major countries’ monetary policies and US dollar movements, risks related to US small and medium-sized banks and debt ceiling negotiations, and the recovery status of China’s economy.

The domestic economy showed a moderate recovery in consumption centered on services, but growth slowdown continued due to weak exports and investment. Employment conditions are generally favorable, but the increase in the number of employed persons has narrowed due to economic slowdown. Going forward, the domestic economy is expected to maintain a sluggish growth trend for some time but gradually recover from the second half of the year due to easing IT sector downturn and the ripple effects of China’s economic recovery. This year’s growth rate is expected to be 1.4%, lower than the February forecast of 1.6%, with high uncertainty related to the timing of IT sector rebound, the extent of China’s economic recovery impact domestically, and the economic trends of major advanced countries.

Consumer prices continued their expected slowing trend, with the inflation rate in April falling from 4.2% in the previous month to 3.7%. This was mainly due to a wider decline in petroleum product prices and a slowdown in processed food price increases. Core inflation (excluding food and energy) remained at 4.0%, and short-term inflation expectations fell to 3.5% in May. Going forward, the consumer price inflation rate is expected to fall significantly due to base effects from last year’s sharp rise in international oil prices, then slightly rise and fluctuate around 3% until the end of the year. The annual inflation rate for this year is expected to align with the February forecast of 3.5%. However, the pace of core inflation slowdown is expected to be more gradual than initially forecast due to accumulated cost pressures and strong service demand, with the inflation rate for this year projected at 3.3%, exceeding the previous forecast of 3.0%. Future inflation paths will be influenced by movements in international oil prices and exchange rates, the degree of domestic and foreign economic slowdown, and whether there are additional public utility fee hikes.

In financial and foreign exchange markets, the won/dollar exchange rate fluctuated significantly due to trade balance trends, expectations of the end of the Federal Reserve’s policy rate hikes, and US debt ceiling negotiations. Long-term government bond yields rose slightly influenced by movements in major countries’ bond yields. Household loans increased slightly, and the decline in housing prices narrowed.

The Monetary Policy Committee will continue to monitor growth trends and operate monetary policy with attention to financial stability to ensure inflation stabilizes at the target level over the medium term. The domestic economy is expected to continue its low growth trend, but inflation is projected to exceed the target level for a considerable period, and given the high uncertainty in policy conditions, the committee will focus on price stability and maintain the tightening stance for a considerable period. The necessity for further rate hikes will be carefully judged by closely examining the pace of inflation slowdown, downside risks to growth and financial stability risks, the effects of previous rate hikes, and changes in major countries’ monetary policies.

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