Monetary Policy Decision
(Statement)
The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 25 basis points, from 3.00% to 3.25%. The Board judges that the policy response to ensure price stability should be continued as inflation has remained high. The size of the Base Rate hike was judged to be appropriate at 25bp, in overall consideration of the easing of risks in the foreign exchange sector and the contraction of short-term financial markets, while the economic slowdown is expected to be greater than forecast in August.
Currently available information suggests that the global economic slowdown has continued, affected by the high inflation, ongoing policy rate hikes in major countries and the prolonged Ukraine crisis. In global financial markets, the US dollar has weakened and long-term market interest rates have fallen, as risk aversion has partly subsided on the expectations of an adjustment to the pace of the US Federal Reserve's policy rate hikes. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected largely by the movements of international commodity prices and global inflation, monetary policy changes in major countries and US dollar trends, and geopolitical risks.
Domestic economic growth has continued to slow with exports shifting to a decrease, although private consumption has maintained its recovery trend. Labor market conditions have continued to be favorable with a low unemployment rate, despite a slowing increase in the number of persons employed. Going forward, domestic economic growth is expected to weaken, affected by the global economic slowdown and the increase in interest rates. GDP growth for this year will be consistent with the August forecast of 2.6%, but that for next year is projected to be 1.7%, considerably lower than the August forecast of 2.1%.
Consumer price inflation has remained high at 5.7% in October due to increases in electricity and gas fees and the accelerating price increases in processed food products, although increases in the prices of petroleum products have moderated. Core inflation (excluding changes in food and energy prices from the CPI) and the inflation expectations of the general public have stayed high at the lower-4% level. Looking ahead, it is forecast that consumer price inflation will somewhat decrease due to the base effect and the economic slowdown, but will remain high at the 5% level for some time. Consumer price inflation is projected to be 5.1% in 2022 and 3.6% in 2023, slightly below the August forecast of 5.2% in 2022 and 3.7% in 2023, but uncertainties are judged to be high related to the movements of exchange rates and global oil prices, the degree of economic slowdown at home and abroad, and the size of increases of electricity and gas fees.
In the financial and foreign exchange markets, the long-term Korean Treasury bond yield and Korean won to US dollar exchange rate have decreased and stock prices have risen due to expectations of an adjustment to the pace of monetary tightening in major countries. However, in the short-term financial markets, yields on project financing asset-backed commercial paper (PF-ABCP) have risen significantly and their transactions have shrunk. Household loans have increased only slightly and housing prices have further decreased in 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 a medium-term horizon as it monitors economic growth, while paying attention to financial stability. The Board sees continued rate hikes as warranted for some time, as inflation is expected to remain high, substantially above the target level, although the domestic economic growth rate has slowed. In this process the Board will determine the size and pace of further increases of the Base Rate while thoroughly assessing the degree of persistence of high inflation, the pace of growth, monetary policy changes in major countries, financial stability conditions, and geopolitical risks.
Opening Remarks to the Press Conference (November 24, 2022)
Today, the Monetary Policy Board (MPB) of the Bank of Korea decided to raise the Base Rate by 25 basis points, from 3.00% to 3.25%. I’ll first go over financial and economic conditions both 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 October MPB meeting, the global economic slowdown continued, due to high inflation and the resultant policy rate hikes in major countries. Specifically, the US economy has seen slowing growth, led by domestic demand. There has been growing concern about economic recession in the euro area, due to energy supply disruptions and heightened price level. The Chinese economy remains sluggish due to declines in property investment and exports. As for the global financial markets, the US Federal Reserve suggested in its November FOMC meeting that it could adjust the pace of its policy rate hikes, although the terminal federal funds rate could be higher than previously expected, and US price indicators also came in below market expectations. Accordingly, risk aversion, which had been greatly heightened, has partially eased. Consequently, the US dollar has weakened significantly, long-term market interest rates in major countries have fallen, and stock prices have risen.
Our domestic economic growth has continued to slow. Although consumption has maintained its recovery momentum, export growth has been slowing rapidly, with exports shifting to a decline in October due to weakening growth in major countries. Turning to inflation conditions, consumer price inflation remained high at 5.7% in October. Although the rise in the prices of petroleum products has slowed, electricity and gas fees have increased further, and prices of processed food have climbed faster. Core inflation and the inflation expectations of the general public are running at 4.2-4.3%.
In the domestic financial markets, long-term Treasury bond yields have declined and stock prices have risen, as the foreign exchange rate stabilized. However, in the money market, interest rates such as those on project financing asset-backed commercial paper have risen sharply, and transactions have shrunk. Such transactions are partially resuming, assisted by market stabilization measures by the Bank of Korea and the government. However, funding in the CP market is still constrained due to credit risk aversion, which has heightened sharply since the Legoland incident, and year-end demand for funds by financial institutions. In the foreign exchange market, strains have been partially eased with the Korean won to US dollar exchange rate falling to mid-1,300 won from the mid-1,400 won level. However, the exchange rate is expected to remain highly volatile for some time, as there are still high uncertainties related to the US Federal Reserve’s monetary policy, China’s Zero-COVID policy, and the resultant movements of the yuan.
Looking at household debt and the housing market, household loans have increased slightly, as the sustained net redemption of unsecured loans offset a rise in housing-related lending. Housing prices have further decreased in both the Seoul metropolitan area and other regions.
In reflection of changes in domestic and external conditions since the August economic outlook, the Bank of Korea has revisited its inflation and growth forecasts. Domestic growth is expected to be lower than previously projected, affected by the global economic slowdown and interest rate increases. The GDP growth rate for this year is projected to be in line with the August forecast of 2.6%, but the growth rate for next year is forecast to be 1.7%, substantially lower than the previous forecast of 2.1%, as exports and investment are likely to be more sluggish than expected along with a moderate recovery in consumption. The lowering of the growth rate for next year is attributed mostly to external factors such as an accelerated slowdown of the global economy, and partially to internal factors such as interest rate increases.
Consumer price inflation is expected to be 5.1% for this year and 3.6% for next year, slightly lower than the August forecasts (5.2% and 3.7%). Despite the projection that the economy would slow further, the downward adjustment to the price forecasts has not been large. This is because the accumulated cost pressure, which has been gradually reflected in electricity and gas fees, processed food, and core items, is expected to largely offset the weakening of the demand pressure from the economic slowdown. With regard to the price forecasts, there are high uncertainties surrounding movements in the exchange rate and oil prices, the degree of economic slowdown at home and abroad, and the size of hikes in electricity and gas fees. Particularly in November, Consumer price inflation could be considerably lower than in October due to the base effects of agricultural and petroleum prices, however the high upward trend at the 5% level is projected to continue through early next year, reflecting the expectation of further increases in electricity and gas fees. The Director General of our Research Department will provide more details about the economic outlook this afternoon.
The Board decided today to raise the Base Rate by 25 basis points. The Board sees it warranted to continue its policy response for price stability as inflation is projected to remain high at the 5% level for some time. Regarding the size of the rate hike, the Board judged that today’s 25 basis-point increase is appropriate, given that the degree of economic slowdown is expected to increase in the future, while the risks in the foreign exchange sector have subsided and funding conditions in short-term financial markets have become constrained.
All the Board members supported the decision unanimously.
Looking ahead, the Bank of Korea deems it warranted to maintain its stance of Base Rate hikes going forward for some time, as inflation is projected to run well above the target level for a considerable time. There are different views among the Board members regarding the level and the timing of the policy rate destination due to high uncertainties surrounding the policy decision. Therefore, the Board will determine the Base Rate in the meetings next January and beyond after closely monitoring policy decisions of the US Federal Reserve, including in the December FOMC meeting, their influence on the foreign exchange market, changes in external conditions such as movements in international commodity prices, the pace of domestic inflation and growth, and financial stability conditions.