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 continued its slowing trend, it is judged that there are high uncertainties around the inflation outlook and it is necessary to assess the changes in domestic and external policy conditions such as monetary policies in major countries and volatility in the exchange rate, and geopolitical risks. The Board, therefore, sees that it is appropriate to maintain its current restrictive policy stance.
The currently available information suggests that global economic growth is projected to continue slowing, but it will be more favorable than expected. Inflation in major countries continues its trend of a slowdown, but it is expected to take a considerable period of time for that inflation to stabilize on the target level. In global financial markets, government bond yields have risen and the U.S. dollar has strengthened due to weakening expectations of an early policy rate cut by the U.S. Federal Reserve. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected by global oil prices and inflation trends, by monetary policy operations in major countries and their effects, and by developments in geopolitical risks.
Domestic economic growth has continued to improve at a modest pace, mainly driven by exports. Labor market conditions have been generally favorable with a continued robust increase in the number of persons employed. Going forward, domestic economic growth is projected to maintain its improving trends with an ongoing increase in exports, despite the slow recovery of consumption and the sluggishness in construction investment. GDP growth for the year is expected to be 2.1%, which is consistent with the November forecast. However, there are high uncertainties regarding the outlook, which are related to the effects of monetary policy in major countries, the pace of improvement in the IT industry, and the impact of real estate project financing (PF) restructuring.
Inflation has maintained its slowing trend. Consumer price inflation has fallen to 2.8% in January due to slower growth in the prices of personal services and processed food products. Core inflation (excluding changes in food and energy prices from the CPI) has slowed to 2.5%, and short-term inflation expectations among the general public have fallen to 3.0%. Looking ahead, it is forecast that consumer price inflation will temporarily rise slightly owing to increases in agricultural product prices, and then gradually fall again. Consumer price inflation for the year is projected to be 2.6%, which is consistent with the November forecast. Core inflation for the year is expected to be 2.2%, slightly lower than the November forecast of 2.3%, reflecting the slow pace of consumption recovery. The future path of inflation is likely to be affected by developments in geopolitical risks, by movements of global oil prices and domestic agricultural product prices, and by economic growth at home and abroad.
In financial and foreign exchange markets, long-term Korean Treasury bond yields and the Korean won to U.S. dollar exchange rate have risen, mainly affected by weakening expectations of an early policy rate cut by the U.S. Federal Reserve. Household loan growth has remained low due to an ongoing reduction in other loans, despite continued growth in housing-related loans. Housing prices have continued to decline across all parts of the country, and risks related to real estate project financing (PF) still remain.
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. While it is forecast that domestic economic growth will continue its improving trend and that inflation will maintain its slowing trend, it is premature to be confident that inflation will converge on the target level. Moreover, uncertainties surrounding domestic and external policy conditions are also judged to be high. The Board, therefore, will maintain a restrictive policy stance for a sufficiently long period of time until the Board is confident that inflation will converge on the target level. In this process, the Board will thoroughly assess the inflation slowdown, risks to financial stability and economic growth, household debt growth, monetary policy operations in major countries, and developments in geopolitical risks.
Opening Remarks to the Press Conference (February 22, 2024)
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 economic conditions at home and abroad, and then explain the background to today’s Base Rate decision.
To begin with changes in external conditions, the global economy is projected to continue slowing but it will be more favorable than expected. Economic conditions have been differentiated across major countries. In the U.S., growth for this year is predicted to be around 2%, much higher than the earlier forecast, due to growing investments and consistently robust labor market conditions. In the euro area, although the economic downturn is expected to ease gradually, the pace is likely to be slow. In China, the economy is projected to grow at the mid-4% level, despite the ongoing slump in the real estate sector, thanks to its economic stimulus.
Inflation in major economies continues its trend of a slowdown, but it is forecast that it will take a considerable period of time for inflation to stabilize on the target level. In the U.S., consumer price inflation stood at 3.1% in January, showing a slower-than-expected moderation, and core inflation remained at 3.9%, the same as the previous month. Going forward, the pace of slowdown is expected to be moderate, and the timing of inflation declining to the 2% level is projected to be after 2025.
As for global financial markets, government bond yields in major economies have risen and the U.S. dollar has strengthened due to the weakening expectations for early policy rate cuts by the U.S. Federal Reserve. Stock prices have risen, primarily in advanced countries, driven by improvements in corporate performances.
Looking at domestic conditions, economic growth has continued to improve at a modest pace with an ongoing increase in exports, mainly driven by semiconductors and automobiles. However, the private consumption recovery has been slow, affected by elevated inflation and interest rates. Domestic inflation has maintained its slowing trend owing to low demand-side pressures. Consumer price inflation in January has fallen to 2.8%, core inflation has slowed to 2.5%, and short-term inflation expectations have also fallen to 3.0% in January and February.
In domestic financial and foreign exchange markets, long-term Korean Treasury bond yields and the Korean won to U.S. dollar exchange rate have risen, affected primarily by changes in expectations for the U.S. monetary policy stance. Stock prices have risen on expectations for improvements in the semiconductor business. With regard to household debt and the housing market, household loans in the financial sector only grew by around 1 trillion won in January, despite a sustained increase in housing-related loans, due to the continued decline in other loans. Housing prices have continued to decline across all parts of the country, and risks related to real estate project financing (PF) still remain.
In addition, the Board has revisited its assessment of future growth and inflation paths, reflecting changes in domestic and external conditions after the November Economic Outlook.
GDP growth for this year is projected to be 2.1%, consistent with our November forecast. Compared with the November forecast, weaker domestic demand, including the downward revision of the private consumption forecast from 1.9% to 1.6%, contributed to lowering the overall growth rate by 0.1%p from the November forecast, yet this decrease was offset by improved exports driven by robust U.S. growth and the recovery in the semiconductor industry, contributing to raising the growth rate by 0.1%p. However, the future growth path is surrounded by high uncertainties regarding the effects of monetary policy in major countries, the pace of improvement in the IT industry, and the impact of domestic real estate project financing (PF) restructuring.
Consumer price inflation for this year is projected to be 2.6%, also consistent with the November outlook. It is expected to temporarily pick up slightly due to the increase in agricultural product prices, and then to decline moderately afterward, slowing to the lower-2% range by the end of the year. Core inflation is projected to be 2.2%, revised slightly down from 2.3% in the November outlook, reflecting the impact of a slow pace of consumption recovery. The future inflation path is likely to be affected by developments of geopolitical risks, by movements of global oil prices and domestic agricultural product prices, and by 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 its slowing trend, there are high uncertainties regarding the inflation outlook. Also, it is necessary to monitor developments of domestic and external risk factors, such as monetary policy in major countries, volatility in the exchange rate, fluctuations in global oil prices from geopolitical risks, and household debt growth. The Board therefore judged that it is appropriate to leave the Base Rate unchanged at its current restrictive level.
All the Board members unanimously supported the decision.
Looking ahead, it is premature to be confident that inflation will converge on the target level. Due to not only supply-side risks including global oil prices but high inflation for living necessaries which limits the decline in inflation expectations, it is anticipated that the process of inflation moderation will not be smooth.
Therefore the Board deems it warranted to stabilize inflation on 2% by maintaining a restrictive monetary policy stance for a sufficiently long period of time. In this process, the Board will determine how long to continue the restrictive monetary policy stance while thoroughly assessing the abovementioned uncertainty factors.