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. Although inflation has slowed, it is forecast to pick up again to around the 3% level since August and to remain above the target level for a considerable time. In addition, uncertainties regarding economic conditions and monetary policy in major countries have risen. It is also necessary to closely monitor household debt trends. The Board, therefore, sees that it is appropriate to maintain its current restrictive policy stance. Regarding the need to raise the Base Rate further, the Board will make a judgement while assessing the changes in domestic and external policy conditions.
The currently available information suggests that global economic growth is projected to continue slowing due to the effects of elevated interest rates and a weakening recovery in the Chinese economy. Global inflation still remains high, though falling gradually, and the pace of the inflation slowdown has differentiated across countries. In global financial markets, government bond yields have risen and the U.S. dollar has strengthened due to prospects for a prolongation of the restrictive policy stance in major countries. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected by the movements of international commodity prices and the global inflation slowdown, monetary policy changes in major countries and their effects, and developments in the Chinese economy.
The improvement in domestic economic growth has somewhat moderated, with private consumption recovery slowing. Labor market conditions have been generally favorable, but the increase in the number of persons employed has been gradually decreasing due to the economic slowdown. Going forward, domestic economic growth is expected to improve gradually with a modest recovery in private consumption and the sluggishness in exports easing. GDP growth for this year is expected to be 1.4%, which is consistent with the May forecast. In the economic outlook, however, uncertainties regarding future growth in the Chinese economy and its domestic impacts, economic growth in major advanced countries, and the timing of a rebound in the IT industry are judged to be high.
Consumer price inflation has continued to moderate as expected, falling to 2.3% in July. This is mainly because the price of petroleum products has fallen substantially owing to the base effect from global oil prices, and the rise in the prices of personal services and processed food products has continued to slow. Both core inflation (excluding changes in food and energy prices from the CPI) and short-term inflation expectations among the general public have declined to 3.3%. Looking ahead, it is forecast that consumer price inflation will pick up again from August and fluctuate at around 3% until the end of the year. Consumer price inflation for the year is expected to be 3.5%, which is consistent with the May forecast. Meanwhile, core inflation is projected to maintain its modest slowdown. However, it is projected to be 3.4% for the year, which is slightly higher than the May forecast of 3.3% due to accumulated cost pressure. The inflation path is likely to be affected by changes in international commodity prices, weather conditions, and economic growth at home and abroad.
In financial and foreign exchange markets, the Korean won to U.S. dollar exchange rate has risen significantly due to prospects for a prolongation of the restrictive monetary policy stance in major countries and concerns about the economic slowdown in China. Long-term Korean Treasury bond yields have risen along with government bond yields in major countries. Meanwhile, the risks to some non-bank financial sectors have somewhat eased. Housing prices in Seoul and its surrounding areas have increased at a faster pace, while in the rest of the country the extent of the decline in housing prices has narrowed. The scale of the increase in household loans has expanded, mainly driven by housing-related loans.
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. It is forecast that domestic economic growth will gradually improve, but inflation will remain above the target level for a considerable time. Moreover, uncertainties surrounding the policy decision are judged to be high. The Board, therefore, will maintain a restrictive policy stance for a considerable time with an emphasis on ensuring price stability, while making a judgement regarding the need to raise the Base Rate further. In this process, the Board will thoroughly assess the inflation slowdown, financial stability risks, economic downside risks, the effects of the Base Rate raises, monetary policy changes in major countries, and household debt growth.
Opening Remarks to the Press Conference (August 24, 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.
To begin, a look at the changes in external conditions since the July meeting shows that global economic growth is expected to continue slowing due to the effects of elevated interest rates and a weakening recovery in the Chinese economy. Economic conditions are differentiated across major economies. In the U.S., the probability of a soft landing for the economy is assessed to have increased as the labor market remains robust and consumption continues to grow. In the euro area, while the sluggishness of the economy has somewhat eased, mainly led by the services sector, economic growth still remains low. In China, concerns about an economic slowdown have risen mainly due to property market instability and sluggish exports.
While inflation in major countries has fallen gradually, it still remains well above the target level. In the U.S., consumer price inflation stood at 3.2% in July, up from 3.0% in June. In the euro area and the U.K., inflation still remains elevated at around the 5%-6% range.
As for global financial markets, major price variables have fluctuated substantially, affected by changes in expectations of monetary policy in major countries and by concerns about the economic slowdown in China. The U.S. dollar has strengthened and government bond yields in major countries have risen due to favorable U.S. economic indicators and the ensuing prospects for a prolongation of the restrictive policy stance.
Looking at domestic conditions, the improvement in domestic economic growth has somewhat moderated. The decline in exports continues to moderate in its underlying trend, although the extent of the decline fluctuated from month to month. Consumption recovery, on the other hand, has somewhat slowed due to weaker pent-up demand and unfavorable weather conditions.
Domestic consumer price inflation continues to moderate as expected, falling to 2.3% in July. This is mainly because the prices of petroleum products have fallen substantially owing to the base effect of global oil prices, and the rise in the prices of personal services and processed food products has continued to slow. Core inflation and short-term inflation expectations both fell to 3.3%.
As for domestic financial and foreign exchange markets, volatility has heightened. The Korean won to U.S. dollar exchange rate has risen significantly due to prospects for a prolongation of the restrictive policy stance in major economies and concerns about the economic slowdown in China. Long-term Korean Treasury bond yields have risen along with government bond yields in major countries. Meanwhile, the risks to some non-bank financial sectors appear to have eased, but the anxiety factors have not been fully resolved.
Looking at household debt and the housing market, housing prices in Seoul and its surrounding areas have increased at a faster pace, and in the rest of the country the extent of decline in housing prices has narrowed, as purchase sentiment strengthened and transactions increased. Affected by this, household loans, mainly driven by housing-related loans, have increased by a larger extent.
In addition, the Board has revisited its review of inflation and growth trends, reflecting changes in domestic and external conditions since the May Economic Outlook.
First, GDP growth for this year is projected to be 1.4%, which is consistent with the May forecast. Our decision to maintain the outlook for this year is based on a combination of downside and upside factors. Downside factors include weakened domestic pent-up consumption, a slow economic recovery in China, and concerns over further tightening by the U.S. Federal Reserve. Upside factors include an influx of group tourists from China and the increased possibility of a soft landing for the U.S. economy. As these uncertainties are expected to be somewhat alleviated by the time of the next MPB meeting, a more accurate assessment of domestic and external economic conditions can be provided then. Our projection for next year's GDP growth has been slightly adjusted downward from 2.3% to 2.2%, reflecting factors such as the slowdown in the Chinese economy.
Consumer price inflation is projected to pick up again from August and fluctuate at around 3% until the end of the year, which aligns with our initial forecast. The growth rate for this year is also expected to be consistent with the May forecast of 3.5%. Core inflation is expected to exhibit a more moderate slowdown than initially projected owing to factors such as accumulated cost pressures. The rate for this year is projected to be 3.4%, slightly higher than the May forecast of 3.3%. The future inflation path is likely to be affected by changes in international commodity prices, weather conditions, and economic growth at home and abroad.
Lastly, I will explain the background to the Base Rate decision, which reflects the abovementioned domestic and external conditions.
Although inflation has continued to slow, it is forecast that there will be a considerable period of time before inflation converges on the target level. In addition, uncertainties regarding monetary policy and economic conditions in major countries have increased. It is also necessary to closely monitor household debt trends. The Board therefore decided today to leave the Base Rate unchanged at its current restrictive level.
All the Board members unanimously supported the decision.
Looking ahead, the Board deems it warranted to maintain the restrictive policy stance for a considerable time and judge whether the Base Rate needs to be raised further.
In this process, the Board will thoroughly assess the slowdown of domestic inflation, financial stability risks, economic downside risks, the effects of accumulated Base Rate hikes, monetary policy changes in major countries, and household debt growth.