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 2.25% to 2.50%. The Board judges that the policy response to prevent the entrenchment of high inflation should be continued as inflationary pressures and inflation expectations have remained high, although economic downside risks have increased at home and abroad.
Currently available information suggests that global economic downside risks have increased, affected by the prolonged Ukraine crisis and significant policy rate hikes in major advanced countries, while inflation has remained high. In global financial markets, major price variables have fluctuated significantly due to changes in expectations for 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, economic indicators and monetary policy changes in major countries, and geopolitical risks.
Downside risks to the Korean economy have increased with the slowdown in exports owing to weakening of economic growth in major countries, while private consumption has continued to recover. Labor market conditions have continued to improve, with the year-on-year increase in the number of persons employed remaining high. Going forward, GDP growth is projected to be 2.6% in 2022 and 2.1% in 2023, below the May forecast of 2.7% in 2022 and 2.4% in 2023, as export growth has slowed.
Consumer price inflation has remained high in the 6% range due to the accelerating price increases in agricultural and personal services, although increases in the prices of petroleum products have somewhat moderated. Core inflation (excluding changes in food and energy prices from the CPI) and the inflation expectations of the general public have stayed high in the upper-3% range and the 4% range, respectively. Looking ahead, it is forecast that consumer price inflation could decline due to the decrease in global oil prices but will remain high in the 5-6% range for a considerable time as core inflation continues to rise. Consumer price inflation is projected to be 5.2% in 2022 and 3.7% in 2023, substantially above the May forecast of 4.5% in 2022 and 2.9% in 2023.
Volatility in domestic financial markets has increased, influenced by global financial market movements. Long-term market interest rates have rebounded after a considerable decline, and the Korean won to US dollar exchange rate has risen significantly due to US dollar strengthening. Household loans have decreased slightly and housing prices have shifted to a decrease.
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, as inflation is expected to remain high, substantially above the target level, despite the increase in economic downside risks and underlying high uncertainties surrounding domestic and external conditions. 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, financial stability conditions such as capital flows, monetary policy changes in major countries, and geopolitical risks.
Opening Remarks to the Press Conference
Today, the Monetary Policy Board (MPB) of the Bank of Korea decided to raise the Base Rate by 25 basis points, from 2.25% to 2.50%. I’ll first go over global and domestic financial economic conditions and the future outlook, and then explain the background to today’s Base Rate decision in detail.
Looking at the changes in external conditions since the July MPB meeting, we’ve seen mounting concerns about a global economic slowdown, affected by the prolonged Ukraine crisis and significant rate hikes, while inflation has remained high at around 8-10% in major advanced economies. More specifically, the US has recorded a negative growth rate for two consecutive quarters due to a pullback in investment, and the euro area has witnessed a significant worsening of economic sentiment amid weak goods consumption. China’s economy has been sluggish under the effects of its lockdown policy. Major price variables have fluctuated greatly in global financial markets due to the heightened uncertainties surrounding the pace of the US Federal Reserve’s policy rate hikes. Government bond yields in major countries have rebounded after considerable falls, and the US dollar has recently shifted rapidly to appreciation after losing value.
The Korean economy has still continued to recover supported by an improvement in consumption. However, downside risks are higher than before with a decline in export growth affected by weaker economic growth in major countries. Concerning inflation, consumer price inflation has run at the 6% level for two consecutive months and core inflation has stayed at around 4%, owing to the persistence of high inflationary pressures both from the supply and demand sides. The inflation expectations of the general public are in the 4% range.
In the domestic financial markets, the volatility of major price variables has heightened. Long-term market interest rates have rebounded after a considerable decline due to changes in Treasury bond yields in major countries. The Korean won to US dollar exchange rate has risen to around 1,340 won recently. Looking at financial stability, household loans in the financial sector decreased slightly in July, as the sustained net redemption of unsecured loans more than offset a rise in housing-related lending. Housing prices have shifted to a decrease since June.
In reflection of changes in domestic and external conditions since the May economic outlook, the Bank of Korea has revisited its inflation and growth forecasts. Consumer price inflation is now projected to be 5.2% this year, substantially above the May forecast (4.5%), as both supply-side and demand-side pressures have expanded further than previously expected and inflation is becoming more broad-based. Consumer price inflation is possibly lower in August than in July, influenced by a sharp drop in oil prices over the past two months, but it is expected to remain high in the 5-6% range until early next year, considering the high uncertainties associated with future international energy prices due chiefly to the Ukraine crisis and the sustained uptrend in core inflation.
GDP growth is expected to be 2.6% this year, slightly below the previous forecast (2.7%). This reflects the projection that, despite a recovery in private consumption, the slowdown in exports is likely to accelerate gradually from the second half of this year affected by the global economic slowdown. Concerning the economic outlook for next year, although uncertainties remain high, consumer price inflation is projected at 3.7% and growth at 2.1%. This is based on the assumptions that oil prices will fall at a modest pace in line with the global economic slowdown and that geopolitical risks including the Ukraine crisis will decrease gradually. The Director General of our Research Department will provide more details about the economic outlook this afternoon.
The Board today raised the Base Rate by 25 basis points, from 2.25% to 2.50%, in consideration of the need to continue its policy response in furtherance of price stability. All the Board members supported the decision unanimously.
To elaborate more on the decision today, the Board judged that a gradual increase of 25 basis points, as suggested at last month’s meeting, is appropriate since current economic conditions are not far from the Board’s July projections for inflation and growth. That is, since the high inflationary pressure with consumer price inflation in the 5-6% range is expected to persist, the Board sees continued rate hikes as warranted to curb the spread of inflation expectations and prevent the entrenchment of high inflation. On the growth side, despite growing economic downside risks, it would be desirable to respond to the risks after further assessing developments of external conditions as uncertainties associated with the Ukraine crisis and the pace of the US Federal Reserve’s policy rate hikes remain high.
Looking ahead, the Bank of Korea sees it as desirable to conduct monetary policy with a focus placed on inflation and sees continued rate hikes as warranted for some time under the current inflation and growth forecast paths. Particularly since there are very high uncertainties associated with the degree of persistence of high inflation, the pace of growth, financial stability conditions such as capital flows, monetary policy changes in major countries, and geopolitical risks, the Bank of Korea will make sure to closely monitor the relevant developments in its conduct of monetary policy.