Monetary Policy Decision
The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 3.50% for the intermeeting period. It is forecast that inflation will continue to be above the target level throughout the year although it is projected to gradually decrease, and uncertainties surrounding the policy decision are also judged to be high. The Board, therefore, sees that it is appropriate to judge whether the Base Rate needs to rise further while assessing the pace of inflation slowdown and developments in the uncertainties.
Currently available information suggests that the slowdown of global economic growth and inflation has continued. However, concerns about a recession in major countries have somewhat decreased due to the easing of concerns over energy supply and demand, as well as labor market conditions continuing to be favorable, and the pace of inflation slowdown in the U.S. has been modest. In global financial markets, volatility in major price variables has increased. The U.S. dollar has shifted to a rapid strengthening after continuing to weaken, and long-term market interest rates have rebounded considerably, led by expectations that the U.S. Federal Reserve’s terminal rate will be higher than previously expected after the announcement of U.S. labor market and price indicators exceeding market expectations. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected largely by the pace of global inflation slowdown, monetary policy changes in major countries and U.S. dollar trends, the recovery in the Chinese economy after the easing of its COVID-19 restrictions, and geopolitical risks.
Although concerns about a recession in major countries have eased, domestic economic growth has continued to slow, with the recovery in private consumption weakening and exports continuing to decrease due to deepened sluggishness in the IT industry. Labor market conditions have generally continued to be favorable, but the decline in the increase in the number of persons employed has continued due to the economic slowdown. Going forward, domestic economic growth is expected to remain weak, affected by the global economic slowdown and the increase in interest rates. Domestic economic growth is expected to improve gradually from the second half of this year with a recovery in the Chinese economy and in the IT industry. However, uncertainties regarding the outlook are judged to be high. GDP growth for this year is projected to be 1.6%, slightly lower than the November forecast of 1.7%.
Consumer price inflation has run at 5.2% in January, which has been higher than the 5.0% in December, due to increases in electricity fees as well as rising prices of processed food products, although increases in the price of petroleum products have moderated. Core inflation (excluding changes in food and energy prices from the CPI) has run at 4.1% in January. Short-term inflation expectations among the general public have run at 4.0% in February. Looking ahead, it is forecast that consumer price inflation will remain around 5% in February, but will gradually decrease owing to the base effect from the sharp rises in global oil prices last year and weakening pressure from the demand side. However, the pace of slowdown is expected to be more modest than in major countries due to the effects of the increases in public utility fees. Consumer price inflation for this year is projected to be 3.5%, slightly lower than the November forecast of 3.6%. Uncertainty surrounding inflation forecasts is judged to be high, regarding movements of global oil prices and exchange rates, the degree of economic slowdown at home and abroad, and the size and effects of the increases in public utility fees.
In financial and foreign exchange markets, volatility has increased in February with a considerable rebound in the Korean won to U.S. dollar exchange rate and in market interest rates, which have shown a decrease since last November due to the possibility of further tightening of the U.S. Federal Reserve’s policy stance. The decrease in household loans has widened, and housing prices have continued to decline across all parts of the country.
The Board will continue to conduct monetary policy in order to stabilize consumer price inflation at the target level over the medium-term horizon as it monitors economic growth, while paying attention to financial stability. Inflation is projected to remain high above the target level although the domestic economic growth rate has slowed, and uncertainties surrounding the policy decision are high. The Board, therefore, deems it warranted to judge whether the Base Rate needs to rise further while maintaining the restrictive policy stance for a considerable time with an emphasis on ensuring price stability. In this process the Board will thoroughly assess the pace of inflation slowdown, the economic downside risks and financial stability risks, the effects of the Base Rate raises, and monetary policy changes in major countries.
Opening Remarks to the Press Conference (February 23, 2023)
Today, the Monetary Policy Board (MPB) of the Bank of Korea decided to leave the Base Rate unchanged at 3.50%. I will first go over financial and economic conditions at home and abroad, and then explain the background to today’s Base Rate decision in detail.
First, looking at the changes in external conditions since the January MPB meeting, the global economy has seen growth and inflation slow, but the pace of the slowdown has moderated more than initially expected. In the U.S. and the euro area which had high concerns for a recession, expectations for a soft landing have heightened as favorable labor market conditions have continued and concerns over energy supply and demand have eased due to warm winter weather. In China, the recovery of economic activity has been more rapid than expected since the easing of COVID restriction policies. Inflation in major countries has declined gradually from the high levels, but the pace of decline has been slow, with U.S. consumer price inflation for January recording 6.4%, only a 0.1%p drop from the 6.5% in December.
As for global financial markets, volatility of major price variables has heightened as uncertainties over the U.S. Federal Reserve’s terminal rate have increased. The U.S. dollar, which had weakened affected by the Federal Reserve’s adjustment of the pace of rate hikes, shifted to a substantial and rapid strengthening in February as U.S. labor and inflation indicators exceeded market expectations. Long-term market interest rates in major countries, which had continued a declining trend, have risen considerably since February. As consumer price inflation in Japan has risen recently, uncertainties regarding the monetary policy by the Bank of Japan as well as the Federal Reserve have also increased.
The Korean economy has continued to slow. Although the global economy slowed by less than expected, exports continued to decline due to deepened sluggishness in the IT industry and recovery in private consumption weakened, affected by high inflation and the increase in interest rates.
Concerning inflation, consumer price inflation rose to 5.2% in January from 5.0% in the previous month. This is largely because electricity fees increased, and the prices of processed food products and other items maintained high upward trends, although increases in petroleum product prices have moderated. Core inflation recorded 4.1% in January and short-term inflation expectations stood at 4.0% in February.
Volatility has heightened in domestic financial and foreign exchange markets. Market interest rates have rebounded from an earlier significant decline affected by movements in Treasury bond yields in major countries. The Korean won to U.S. dollar exchange rate had dropped to the lower-1,200 won range, but has recently increased to around 1,300 won, in line with the shift to U.S. dollar strengthening.
Looking at household debt and the housing market, housing sales prices in both the Seoul metropolitan area and in other regions have continued to decrease. Household loans have declined significantly, led by increases in interest rates and the sluggishness in the housing market.
The Board has revisited its review of future inflation and growth trends, reflecting changes in internal and external conditions since the November MPB meeting. First, GDP growth for this year is projected to be 1.6%, which is slightly below the November forecast of 1.7%. This projection comprehensively reflects both the upward adjustment factors (+0.2%p), such as the possibility of a soft landing in the United States and in Europe, and the downward adjustment factors (-0.3%p), including the sluggishness in the IT industry and domestic real estate market. The economy is expected to improve gradually going into the second half of this year. However, there are still high uncertainties related to monetary policies in major economies, the recovery in the Chinese economy, and the domestic real estate market.
Consumer price inflation is expected to be around 5% in February and drop significantly in March, owing chiefly to the base effect of a surge in global oil prices last year. It will continue its downward trend to hit the lower-3% range at the end of this year mainly affected by the weakening of demand-side pressure. As a result, annual inflation is projected to reach 3.5%, slightly below the November forecast of 3.6%. Compared to major economies, the level of inflation in Korea will likely be lower, while the pace of slowdown is expected to be more moderate, due to the effects of the increases in public utility fees. Concerning this inflation forecast, uncertainties remain high regarding movements of global oil prices and the exchange rate, the degree of economic slowdown at home and abroad, and the effects of the increases in public utility fees.
The Board decided today to leave the Base Rate unchanged at 3.50%. It is forecast that inflation will continue running above the target level throughout the year although it is projected to gradually decrease. Also, uncertainties surrounding policy decisions are high. The Board therefore judged that, while leaving the rate unchanged at the current level, it is appropriate to closely monitor developments of several uncertainty factors. They include ① the pace of inflation slowdown, ② the U.S. Federal Reserve’s terminal rate, ③ the effects of China’s economic recovery on the domestic economy, ④ the effects of a sluggish domestic real estate market on financial stability, and ⑤ the effects of accumulated Base Rate hikes.
One members―Cho Yoon-Je―voted against the decision to leave the Base Rate unchanged, proposing to raise it by 25 basis points.
Looking ahead, the Board will judge whether the Base Rate needs to rise further while maintaining its restrictive policy stance for a considerable time. This is attributable to the fact that inflation throughout the year is expected to run above the target level, even if the trend of inflation going forward is consistent with the current forecast. In this process, the Board will operate monetary policy in a sophisticated manner while thoroughly assessing developments of the abovementioned uncertainties and their effects.
Finally, I would like to emphasize once again that, against a backdrop of greater uncertainty than ever, the decision to leave the Base Rate unchanged at today’s meeting was taken, after having raised it at every MPB meeting since last April.
Also, I don’t want today’s decision to be seen as the end of the rate hikes.
Although the Board raised the Base Rate at every meeting due to exceptionally high inflation last year, previously it was ordinary to pause after raising the rate to examine the need for further increases. Today’s decision could be understood as returning to this usual way in the past.