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. It is forecast that inflation will continue to be above the target level for a considerable time although it is projected to continue to slow, and uncertainties surrounding the policy decision are also judged to be high with increasing risks to the financial sector in major countries. The Board, therefore, sees that it is appropriate to judge whether the Base Rate needs to rise further while assessing the pace of inflation slowdown, financial stability conditions and developments in other uncertainties.

The currently available information suggests that the recovery of global economic growth has been more favorable than expected, but economic downside risks have increased due to heightened risks in the financial sector in major countries since the failure of Silicon Valley Bank in the U.S. Global inflation still remains high while continuing its slowdown, and core inflation is declining at a relatively slow pace. In global financial markets, the volatility of major price variables has increased significantly, affected by risks to the financial sector and changes in expectations for the U.S. Federal Reserve’s monetary policy. As financial unrest has weakened expectations of tightening by the U.S. Federal Reserve, the U.S. dollar has shown a downtrend after having strengthened until early March. Long-term market interest rates in major countries have also fallen significantly since mid-March, after having continued to rise. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected by the pace of global inflation slowdown, risks to the financial sector, monetary policy changes in major countries, U.S. dollar trends, and the recovery in the Chinese economy.

Domestic economic growth has continued to slow with exports continuing to decrease significantly due to deepened sluggishness in the IT industry, although private consumption has somewhat recovered from its slowdown in the fourth quarter last year. Labor market conditions have generally continued to be favorable, but the decline in the increase in the number of persons employed has continued due to the economic slowdown. Going forward, domestic economic growth is expected to remain weak until the first half of this year, affected by the global economic slowdown and the Base Rate raises. From the second half of this year, it is expected to recover gradually with an easing of the sluggishness in the IT industry and the impact of the Chinese economic recovery. GDP growth for this year is projected to be slightly below the February forecast of 1.6%, but uncertainties regarding the outlook are judged to be high.

Consumer price inflation has continued to moderate at 4.2% in March, declining from 4.8% in February. This is mainly because the decline in the price of petroleum products has widened and the sustained rise in the prices of processed food products has weakened. Core inflation (excluding changes in food and energy prices from the CPI) in March has run at 4.0%, the same as in February. Short-term inflation expectations among the general public have run at 3.9%, which is slightly lower than in February. Looking ahead, it is forecast that consumer price inflation will continue to moderate and decline to the 3% range from the second quarter this year, owing to the base effect from the sharp rises in global oil prices last year and weakening pressure from the demand side. Consumer price inflation for this year is expected to be consistent with the February forecast of 3.5%. Meanwhile, it is judged that core inflation is likely to be somewhat higher than the February forecast of 3.0% for this year, considering its slow pace of decline recently. Uncertainty surrounding inflation forecasts is judged to be high regarding movements of global oil prices and exchange rates, the degree of economic slowdown at home and abroad, and the time and size of the increases in public utility fees.

In financial and foreign exchange markets, major price variables have become more volatile, affected mainly by global financial market movements. Long-term market interest rates have shown a considerable increase along with government bond yields in major countries until early March, and then they fell significantly after the failure of Silicon Valley Bank. The Korean won to U.S. dollar exchange rate has been fluctuating considerably, affected by trends in the trade balance, concerns about financial unrest in major countries, and weakening expectations of tightening by the U.S. Federal Reserve. Household loans and housing prices have continued to go downward, but to a lesser extent.

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. Inflation is projected to remain high above the target level for a considerable time despite the slowdown of the domestic economic growth rate and inflation. Moreover, uncertainties surrounding the policy decision are judged to be high. The Board, therefore, deems it warranted to judge whether the Base Rate needs to rise further while maintaining the restrictive policy stance for a considerable time with an emphasis on ensuring price stability. In this process the Board will thoroughly assess the pace of inflation slowdown, the economic downside risks and financial stability risks, the effects of the Base Rate raises, and monetary policy changes in major countries.

Opening Remarks to the Press Conference (April 11, 2023) 

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 financial and economic conditions at home and abroad, and then explain the background to today’s Base Rate decision in detail.

To begin, a look at the changes in external conditions since the February meeting shows that the global economy has faced greater economic uncertainties as the risks to the financial sector increased with the failure of Silicon Valley Bank (SVB). In the U.S. and the euro area, which had shown a stronger-than-expected recovery until February, economic downside risks have risen since March, with greater risk to financial stability amid banking sector stress and with signs of a slowdown in labor markets. The Chinese economy continues to recover after the re-opening, driven by domestic demand, but its exports remain sluggish.

Global inflation has slowed gradually from the previous high levels. However, core inflation has been sticky, declining at a slow pace in the U.S. and continuing to rise in the euro area.

As for global financial markets, volatility of major price variables has heightened significantly, affected by risks to the financial sector and the changes in expectations for the U.S. Federal Reserve’s monetary policy. The U.S. dollar, which had strengthened until early March amid expectations of further tightening by the U.S. Federal Reserve, weakened considerably as the expectations subsided after the failure of SVB. Long-term market interest rates in major countries, which had sustained an uptrend, also fell significantly since March. 

Looking at the Korean economy, growth continues to slow, affected by the global economic slowdown and the accumulated Base rate hikes. Although the sluggishness in consumption has somewhat eased, as exports continued to decline significantly, growth in the first quarter is forecast to only turn slightly positive. GDP growth for this year is projected to be slightly below the February forecast of 1.6%, affected by the deepened sluggishness in the IT industry. Domestic economic growth is expected to remain weak until the first half of this year, but it is expected to improve gradually from the second half of this year, with an easing of the sluggishness in the IT industry and the impact of the Chinese economic recovery.

Concerning inflation, consumer price inflation in March was still high at 4.2%, but it declined from 4.8% in February continuing its slowing trend since the second half of last year. This is mainly because the decline in the prices of petroleum products has widened due to the base effect of a surge in global oil prices last year, and the sustained rise in the prices of processed food products has begun to weaken. However, core inflation and short-term inflation expectations in March recorded 4.0% and 3.9%, respectively, staying the same or declining only slightly from the 4.0% of the previous month. Going forward, consumer price inflation is projected to sustain its slowing trend and decline to the 3% range in the second quarter, and reach around 3% at the year-end. Consumer price inflation for this year is forecast to be generally consistent with the February forecast of 3.5%. Meanwhile, it is judged that core inflation is likely to be somewhat higher than the February forecast path, given its slow pace of decline recently. However, there are still high uncertainties on the inflation forecast regarding global oil price movements in line with production cuts by oil-producing countries, the degree of economic slowdown at home and abroad, and the time and size of the increases in public utility fees.

As for domestic financial and foreign exchange markets, the direct impact from the SVB failure has been limited, but the volatility of price variables has heightened affected by global financial market movements. The Korean won to U.S. dollar exchange rate has fluctuated at around the 1,300-won range due to a mixture of upside factors including greater risks to the financial sector in major countries and a continued trade deficit, as well as downside factors including weakened expectations of tightening by the U.S. Federal Reserve. Long-term market rates rose substantially until early March along with government bond yields in major countries, and they both fell after mid-March.

Looking at household debt and the housing market, the decline in household loans and the fall in housing prices have continued, but the extent of the decrease has narrowed.

The Board decided today to leave the Base Rate unchanged at 3.50%. It is forecast that inflation will remain above the target level for a considerable time although it is projected to continue to slow. Also, uncertainties surrounding the policy decision are high with increasing risks to the financial sector in major countries. The Board, therefore judged that, while leaving the rate unchanged at the current level, it is appropriate to monitor the pace of inflation slowdown, financial stability conditions, and the development in other uncertainties.

All the Board members supported the decision unanimously.

Looking ahead, the Board deems it warranted to judge whether the Base Rate needs to rise further while maintaining the restrictive policy stance for a considerable time. This is attributable to the fact that inflation is still high and it is expected to remain above the target level throughout the year even if it continues to slow as currently forecast. It is too early to be relieved that prices will stabilize. In this process, the Board will operate monetary policy in a sophisticated manner while thoroughly assessing the pace of inflation slowdown, risks to the domestic and global financial sector, the U.S. Federal Reserve’s monetary policy operation, the impact of the Chinese economic recovery on the domestic economy, and the effects of accumulated Base Rate hikes.

- Opening Remarks to the Press Conference(2304).pdf
- Monetary Policy Decision(2304).pdf