Monetary Policy Decision

The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 25 basis points, from 1.25% to 1.50%.

Currently available information suggests that inflation has accelerated while the recovery of the global economy has somewhat moderated, affected by the Ukraine crisis. In global financial markets, government bond yields in major countries have risen sharply and the US dollar has strengthened, mainly due to changes in expectations about the pace of the US Federal Reserve’s policy normalization. Stock prices have rebounded after a considerable decline. Looking ahead, the Board expects that the global economy will resume its trend of recovery, supported by the easing of COVID-19 restrictions in major countries, but sees it 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. Exports have sustained their buoyancy while facilities investment has slowed due to global supply constraints. Private consumption has recently shown modest improvement thanks to the easing of domestic COVID-19 restrictions, after having moderated. Labor market conditions have continued to improve, with the year-on-year increase in the number of persons employed remaining high. Going forward, the economy is likely to sustain its recovery albeit partly affected by the Ukraine crisis, as exports are expected to continue their solid trend of growth while private consumption is likely to improve. GDP growth this year is projected to be somewhat below the February forecast of 3%.

Consumer price inflation has risen significantly to the lower-4% level due to soaring prices of petroleum products as well as the accelerating increase in the prices of industrial products and personal services. Core inflation (excluding changes in food and energy prices from the CPI) and the inflation expectations of the general public have increased to the upper-2% level. Looking ahead, it is forecast that consumer price inflation will remain high in the 4% range for some time, and run substantially above the February forecast of 3.1% for the year overall. Core inflation is forecast to remain around 3% for a considerable time. 

In domestic financial markets, long-term market interest rates and the Korean won to US dollar exchange rate have risen significantly while stock prices have fluctuated considerably, mainly driven by global financial market movements. Household loans have decreased slightly and housing prices have fallen slightly, especially in the Seoul metropolitan area.

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 recovery and inflation to run above the target level for a considerable time, despite underlying uncertainties in domestic and external conditions. 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, monetary policy changes in major countries, geopolitical risks, and the trends of growth and inflation.