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, it is necessary to further monitor monetary policy in major countries and 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 has been more favorable than expected, but the growth is projected to gradually slow due to the effects of elevated interest rates. While global inflation has fallen gradually, the pace of the inflation slowdown has differentiated across countries. In global financial markets, government bond yields have risen as major countries have strengthened their restrictive monetary policy stance, and the U.S. dollar has weakened due to a slowdown in U.S. inflation after having strengthened. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected by the pace of the global inflation slowdown, monetary policy changes in major countries and their effects, and the recovery in the Chinese economy.
The sluggishness of domestic economic growth has somewhat eased, as the decline in exports has moderated. Labor market conditions have been generally favorable, with the increase in the number of persons employed being higher than expected. Going forward, domestic economic growth is expected to recover gradually with private consumption continuing its modest recovery and exports improving due to the easing of the sluggishness in the IT industry. GDP growth for this year is expected to be consistent with the May forecast of 1.4%.
Consumer price inflation has continued to moderate as expected, falling significantly from 3.3% in May to 2.7% in June. This is mainly because the decline in the price of petroleum products has widened owing to the base effect from global oil prices, and the rise in the prices of personal services has weakened. Core inflation (excluding changes in food and energy prices from the CPI) has declined considerably from 3.9% in May to 3.5% in June, and short-term inflation expectations among the general public have stayed at 3.5%, the same as in May. Looking ahead, it is forecast that consumer price inflation will continue slowing until July, but then will pick up after August and fluctuate at around the 3% level until the end of the year. Consumer price inflation for the year is expected to be generally consistent with the May forecast of 3.5%. Meanwhile, core inflation is projected to maintain its slowing trend in the second half of the year. However, it is to be slightly higher than the May forecast of 3.3%, due to accumulated cost pressure and continuing favorable demand for services.
In financial and foreign exchange markets, the Korean won to U.S. dollar exchange rate has fluctuated considerably and Korean Treasury bond yields have risen, affected by changes in expectations of monetary policy in major countries. Meanwhile, the risks to some non-bank financial sectors have expanded. Housing prices in Seoul and its surrounding areas have shifted to an increase, while in the rest of the country, the extent of the decline in housing prices has greatly 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. In this process, the Board will make a judgement regarding the need to raise the Base Rate further, while thoroughly assessing the pace of inflation slowdown, financial stability risks, economic downside risks, the effects of the Base Rate raises, and monetary policy changes in major countries.
Opening Remarks to the Press Conference (July 13, 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 May meeting shows that global economic growth has been more favorable than expected, but the growth is projected to slow gradually affected by elevated interest rates. Economic conditions appear to be more or less differentiated across major economies. Growth in the U.S. is expected to decline gradually as the effects of rate hikes spread, but expectations of a soft landing for the economy have somewhat heightened as the labor market has remained robust. The euro area is likely to extend its modest economic growth due to high inflation and the ongoing rate hikes. The Chinese economy has shown a weaker recovery due to sluggish exports and a deepened slump in its property market, and its growth outlook has been revised downward.
While inflation in major countries has declined gradually, the pace of slowdown is differentiated across countries. In the U.S., consumer price inflation fell to 3.0% in June, declining at a relatively rapid pace. In the euro area, however, inflation was high at 5.5% in June, declining at a slower pace. Meanwhile, in the U.K., inflation has been sticky still being at around the 7%-8% level.
As for global financial markets, major price variables have fluctuated substantially, mainly affected by changes in expectations of monetary policy in major countries. Long-term government bond yields have risen following the upward adjustment of terminal rate expectations in major advanced economies. The U.S. dollar had strengthened as the June FOMC meeting left open the possibility of about two more rate hikes, and then has weakened recently affected by the slowing employment and price indicators.
Looking at domestic conditions, the sluggishness of domestic economic growth has somewhat eased, as the downtrend of exports has moderated.
Going forward, domestic economic growth is projected to recover gradually, as exports improve due to the easing of the sluggishness in the IT industry and as consumption continues its modest recovery. This economic growth is consistent with the May forecast, and the growth rate for this year is expected to be in line with the previous forecast of 1.4%. The growth rate for the first half of the year is expected to be slightly above the original forecast due to the easing of sluggish exports, but for the second half uncertainties surrounding the growth path have been elevated owing to the slow recovery in China.
Domestic inflation continues to slow in line with the original forecast as the decline in the prices of petroleum products has widened, and as the increase in prices of personal services has slowed. Consumer price inflation fell to 2.7% in June, the first decline into the 2% range since September 2021. Core inflation, which had been sticky so far, fell considerably to 3.5% in June from the 3.9% of the previous month. Meanwhile, short-term inflation expectations remained unchanged from the previous month at 3.5%.
Looking ahead, consumer price inflation is forecast to continue to slow until July, but then rise again since August, and then fluctuate at around 3% until the end of the year. Consumer price inflation for this year is expected to be generally consistent with the May forecast of 3.5%. Core inflation is projected to maintain its slowing trend in the second half as well, but is expected to be slightly above the previous forecast of 3.3% this year due to accumulated cost pressures and favorable demand in services.
As for domestic financial and foreign exchange markets, major price variables have fluctuated, affected by changes in expectations of monetary policy in major countries. Long- and short-term Korean Treasury bond yields have risen in line with government bond yields in major countries, and the Korean won to U.S. dollar exchange rate has fluctuated recently at around the upper-1,200 won level, after rising to the 1,330 won level. Meanwhile, liquidity risks increased at some non-bank institutions due to the rapid rise in delinquency rates and ensuing fears, but then have subsided.
Looking at household debt and the housing market, the extent of the decline in nationwide housing prices has narrowed significantly. In Seoul and its surrounding areas, apartment prices shifted to an increase as the sluggishness in purchase sentiment eased and as the number of transactions increased. Affected by this, household loans, mainly driven by housing-related loans, increased by a larger extent in May and June after shifting to an increase in April.
The Board decided today to leave the Base Rate unchanged at 3.50% in consideration of the abovementioned domestic and external conditions. 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. Also, there is a need to further monitor monetary policy in major countries and household debt trends. The Board therefore judged that it is appropriate to maintain its current restrictive policy stance.
All the Board members unanimously supported the decision.
Looking ahead, it is forecast that there will be a considerable period of time before inflation converges on the target level. Also, there still remain uncertainties related to the degree of further tightening of monetary policy in major countries and its effects on the foreign exchange sector. In addition, there is a need to be attentive to household debt trends. The Board therefore deems it warranted to maintain the restrictive policy stance for a considerable time.
In this process, the Board will judge whether the Base Rate needs to rise further while thoroughly assessing the pace of inflation slowdown, financial stability risks, economic downside risks, and monetary policy changes in major countries and its effects on the foreign exchange sector.