The Bank of Korea’s Statement on Monetary Policy Decision in August


The Monetary Policy Board of the Bank of Korea has chosen to maintain the Base Rate at 3.50 percent for the intermeeting period. Despite the fact that inflation has decreased, it is expected to go back up to around the 3 percent mark in August and stay above the target level for a lengthy period. Additionally, questions about economic conditions and monetary policy in major countries have grown. It is also essential to keep a close eye on household debt trends. In view of this, the Board believes that it is suitable to preserve its current restrictive policy stance. With respect to the necessity of raising the Base Rate further, the Board will make a judgement while evaluating the changes in external and internal policy conditions.

At present, global economic growth is likely to keep on slowing due to the effects of high interest rates and a weakening recovery in the Chinese economy. Global inflation is still high, though decreasing gradually, and the speed of the inflation decrease has varied among countries. In the international financial markets, government bond yields have gone up and the U.S. dollar has become stronger due to the prospects of a prolongation of the restrictive policy stance in major countries. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected by the movements of international commodity prices and the global inflation decrease, monetary policy changes in major countries and their effects, and developments in the Chinese economy.

The improvement in domestic economic growth has somewhat weakened, with private consumption recovery slowing. Labor market conditions have generally been favorable, however the increase in the number of people employed has been gradually decreasing due to the economic slowdown. Going forward, domestic economic growth is expected to improve gradually with a modest recovery in private consumption and the sluggishness in exports easing. GDP growth for this year is expected to be 1.4 percent, which is consistent with the May forecast. In the economic outlook, however, uncertainties regarding future growth in the Chinese economy and its domestic impacts, economic growth in major advanced countries, and the timing of a rebound in the IT industry are judged to be high.

Consumer price inflation has continued to moderate as anticipated, falling to 2.3 percent in July. This is mainly because the price of petroleum products has dropped significantly due to the base effect from global oil prices, and the rise in the prices of personal services and processed food products has continued to slow. Both core inflation (excluding changes in food and energy prices from the CPI) and short-term inflation expectations among the general public have declined to 3.3 percent. Looking ahead, it is forecast that consumer price inflation will go back up again from August and fluctuate at around 3 percent until the end of the year. Consumer price inflation for the year is expected to be 3.5 percent, which is consistent with the May forecast. Meanwhile, core inflation is projected to maintain its modest slowdown. However, it is projected to be 3.4 percent for the year, which is slightly higher than the May forecast of 3.3 percent due to accumulated cost pressure. The inflation path is likely to be affected by changes in international commodity prices, weather conditions, and economic growth at home and abroad.

In financial and foreign exchange markets, the Korean won to U.S. dollar exchange rate has risen significantly due to prospects for a prolongation of the restrictive monetary policy stance in major countries and concerns about the economic slowdown in China. Long-term Korean Treasury bond yields have gone up along with government bond yields in major countries. Meanwhile, the risks to some non-bank financial sectors have somewhat eased. Housing prices in Seoul and its surrounding areas have increased at a faster pace, while in the rest of the country the extent of the decline in housing prices has 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, while making a judgement regarding the need to raise the Base Rate further. In this process, the Board will thoroughly assess the inflation decrease, financial stability risks, economic downside risks, the effects of the Base Rate raises, monetary policy changes in major countries, and household debt growth. (END)

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