Monetary Policy Decision

The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 1.25% for the intermeeting period.

Currently available information suggests that the global economy has continued to recover despite the spread of coronavirus variants, as economic activity has not contracted significantly, supported by accelerated vaccinations. Volatility in global financial markets has increased, affected by concerns over the pace of the US Federal Reserve’s policy rate hikes as well as the Ukraine crisis. Government bond yields in major countries have risen sharply and stock prices have fallen considerably. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected largely by COVID-19 developments, global inflation movements, monetary policy changes in major countries and geopolitical risks.

The Korean economy has continued to recover despite the resurgence of COVID-19. Although the improvement in private consumption has moderated owing to the tightening of domestic COVID-19 restrictions, exports have sustained their buoyancy thanks to robust global demand. Facilities investment has somewhat slowed due to global supply constraints. Labor market conditions have continued to improve, with a sustained trend of increase in the number of persons employed. Going forward, the economy is likely to sustain its sound growth, as the recovery of private consumption is forecast to gradually pick up again while exports are expected to continue their solid trend of increase. GDP growth this year is projected to be around 3%, not deviating greatly from the November forecast.

Consumer price inflation has remained high in the mid- to upper-3% range due to the ongoing sharp rise in the prices of petroleum products, as well as the accelerating increase in the prices of personal services and industrial products. Core inflation (excluding changes in food and energy prices from the CPI) has risen to the mid-2% level. The inflation expectations of the general public have run at the mid- to upper-2% level. Looking ahead, it is forecast that consumer price inflation will run substantially above 3% for a considerable time, exceeding the path projected in November, and run at the lower-3% level for the year overall. Core inflation is forecast to rise to the mid-2% level this year.

In domestic financial markets, long-term market interest rates have risen significantly and stock prices have fallen considerably while the Korean won to US dollar exchange rate has increased slightly, mainly driven by global financial market movements. The amount of increase in household loans has lessened, and the increase in housing prices has moderated in all parts of the country.

The Board will continue to conduct monetary policy in order to sustain the recovery of economic growth and stabilize consumer price inflation at the target level over a medium-term horizon, while paying attention to financial stability. The Board will appropriately adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth and inflation to run above the target level for a considerable time, despite underlying uncertainties over the virus. In this process the Board will judge when to further adjust the degree of accommodation while thoroughly assessing developments related to COVID-19, the risk of a buildup of financial imbalances, the effects of the Base Rate raises, monetary policy changes in major countries, and the trends of growth and inflation.