The Monetary Policy Committee Holds Base Rate Steady... "Tightening Stance to Continue for a Considerable Period"

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 13th. (Photo by Bank of Korea)

On the 13th, the Monetary Policy Committee of the Bank of Korea decided to keep the base interest rate steady at 3.5%, stating that it will "focus on price stability and maintain a tightening stance for a considerable period."

In the monetary policy direction statement released that day, the committee explained, "We decided to operate monetary policy by maintaining the base rate at the current level (3.50%). Although the inflation rate continues to slow down, it is expected to rise again to around 3% after August and remain above the target level for a considerable period. Given the need to monitor major countries' monetary policies and household debt trends, it is deemed appropriate to maintain the current tightening stance."

Looking ahead, the committee forecast that the Korean economy will gradually recover its growth momentum. It stated, "The domestic economy's growth slowdown has somewhat eased as the decline in exports has slowed, and employment remains generally favorable with a higher-than-expected increase in the number of employed persons."

It added, "Going forward, the domestic economy is expected to gradually recover as consumption continues a moderate recovery and exports improve due to the easing of the IT sector downturn. The growth rate for this year is expected to align with the May forecast of 1.4%."

Consumer prices showed a significant slowdown, with the inflation rate dropping from 3.3% in May to 2.7% in June, consistent with initial expectations. This was attributed to the base effect of international oil prices, an expanded decline in petroleum product prices, and a slowdown in the rise of personal service prices.

The core inflation rate (excluding food and energy) also fell significantly from 3.9% in May to 3.5% in June. The committee noted, "Consumer price inflation is expected to continue slowing until July but will rise again after August, fluctuating around 3% until the end of the year."

The annual consumer price inflation rate for this year is expected to generally align with the May forecast of 3.5%.

The committee pointed out, "In the financial and foreign exchange markets, the won-dollar exchange rate has fluctuated significantly due to changes in expectations regarding major countries' monetary policies, and government bond yields have risen amid increased risks in some non-bank sectors. Housing prices have turned upward in the Seoul metropolitan area, and the scale of household loans, mainly housing-related loans, has expanded."

The committee emphasized, "We will continue to operate monetary policy with a focus on price stability and maintain a tightening stance for a considerable period while monitoring growth trends and ensuring that inflation stabilizes at the target level over the medium term, paying close attention to financial stability.

At the same time, we will carefully assess the pace of inflation slowdown, risks to financial stability, downside risks to growth, the effects of past rate hikes, and changes in major countries' monetary policies to determine the necessity of additional rate increases."

Below is the full text of the monetary policy direction statement.

Bank of Korea Governor Lee Chang-yong is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 13th. (Photo by Bank of Korea)

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 continues to slow, it is expected to rise again to around 3% after August and remain above the target level for a considerable period. Given the need to monitor major countries' monetary policies and household debt trends, it is deemed appropriate to maintain the current tightening stance. The necessity for additional rate hikes will be assessed by reviewing changes in domestic and external policy conditions.

The global economy is showing a better-than-expected growth trend but is projected to gradually slow due to the impact of higher interest rates. Global inflation is gradually decreasing, but the pace of slowdown varies by country. In international financial markets, major advanced economies have strengthened monetary tightening, causing government bond yields to rise. The US dollar initially strengthened but weakened later due to a slowdown in US inflation. Going forward, the global economy and international financial markets are expected to be influenced by the pace of global inflation slowdown, changes and spillover effects of major countries' monetary policies, and the recovery status of the Chinese economy.

The domestic economy's growth slowdown has somewhat eased as the decline in exports has slowed. Employment remains generally favorable with a higher-than-expected increase in the number of employed persons. Going forward, the domestic economy is expected to gradually recover as consumption continues a moderate recovery and exports improve due to the easing of the IT sector downturn. The growth rate for this year is expected to align with the May forecast of 1.4%.

Consumer prices showed a significant slowdown in June, with the inflation rate dropping from 3.3% in May to 2.7%, consistent with initial expectations. This was mainly due to the base effect of international oil prices, an expanded decline in petroleum product prices, and a slowdown in the rise of personal service prices. The core inflation rate (excluding food and energy) also fell significantly from 3.9% in May to 3.5% in June, and short-term inflation expectations remained at 3.5%, the same as the previous month. Consumer price inflation is expected to continue slowing until July but will rise again after August, fluctuating around 3% until the end of the year. The annual consumer price inflation rate for this year is expected to generally align with the May forecast of 3.5%. Core inflation is expected to continue slowing in the second half of the year, but cumulative cost pressures and sustained strong demand for services are likely to cause the annual core inflation rate to slightly exceed the previous forecast of 3.3%.

In the financial and foreign exchange markets, the won/dollar exchange rate has fluctuated significantly due to changes in expectations regarding major countries' monetary policies, and government bond yields have risen amid increased risks in some non-bank sectors. Housing prices have turned upward in the Seoul metropolitan area, while the decline in other regions has significantly narrowed. Household loans, mainly housing-related loans, have expanded in scale.

The Monetary Policy Committee will continue to monitor growth trends and operate monetary policy with attention to financial stability to ensure that inflation stabilizes at the target level over the medium term. As the domestic economy gradually improves but inflation is expected to remain above the target level for a considerable period and policy uncertainties remain high, the committee will focus on price stability and maintain a tightening stance for a considerable period. In this process, it will carefully assess the pace of inflation slowdown, risks to financial stability, downside risks to growth, the effects of past rate hikes, and changes in major countries' monetary policies to determine the necessity of additional rate increases.

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