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 remain above the target level for a considerable time although it is projected to continue to slow. The Board, therefore, sees that it is appropriate to maintain its current restrictive policy stance. Regarding the need to raise the Base Rate further, the Board will make a judgement while assessing the changes in domestic and external policy conditions.

 

The currently available information suggests that global economic growth has been more favorable than expected, but growth is projected to gradually slow due to the restrictive monetary policy stance being sustained in major countries and due to the contraction in bank credit supply. Global inflation still remains high, while continuing its slowdown, and core inflation is declining at a relatively slow pace.

 

In global financial markets, the U.S. dollar initially weakened as the U.S. Federal Reserve signaled a potential end to rate hikes, but then it has fluctuated since mid-May affected by economic indicators exceeding market expectations and by developments in U.S. debt ceiling negotiations. Long-term government bond yields in major countries have risen after having fluctuated within a narrow range. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected by the pace of global inflation slowdown, monetary policy changes in major countries, U.S. dollar trends, risks to small and medium-sized U.S. banks, debt ceiling negotiations in the U.S., and the recovery in the Chinese economy.

 

Domestic economic growth has continued to slow, with ongoing sluggishness of exports and investment, although private consumption has shown a modest recovery led by services. Labor market conditions have generally continued to be favorable, but the increase in the number of persons employed has declined due to the economic slowdown. Going forward, domestic economic growth is expected to remain weak for some time. From the second half of this year, however, 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 1.4%, lower than the February forecast of 1.6%, but uncertainties regarding the timing of a rebound in the IT industry, the domestic impact of the recovery in the Chinese economy, and economic growth in major advanced countries are all judged to be high.

 

Consumer price inflation has continued to moderate as expected, declining from 4.2% in March to 3.7% in April. This is mainly because the decline in the price of petroleum products has widened and the rise in the prices of processed food products has weakened. Core inflation (excluding changes in food and energy prices from the CPI) has stayed at 4.0%, and short-term inflation expectations among the general public have moved down to 3.5% in May. Looking ahead, it is forecast that consumer price inflation will fall considerably owing to the base effect from the sharp rises in global oil prices last year, and then will rise slightly and fluctuate at around the 3% level until the end of this year. Consumer price inflation for this year is expected to be consistent with the February forecast of 3.5%. Meanwhile, it is judged that the pace of core inflation slowdown is likely to be more modest than previously forecast due to accumulated cost pressure and favorable demand in services. Core inflation is projected to be 3.3%, which is higher than the February forecast of 3.0%. The inflation path is likely to be affected by movements of global oil prices and exchange rates, the degree of economic slowdown at home and abroad, and any further increase in public utility fees.

 

In financial and foreign exchange markets, the Korean won to U.S. dollar exchange rate has fluctuated considerably due to trends in the trade balance, expectations of an end to policy rate hikes by the U.S. Federal Reserve, and negotiations on the U.S. debt ceiling.

Long-term Korean Treasury bond yields have shown a modest increase, influenced by the movements of government bond yields in major countries. Household loans have slightly increased and the extent of the decline in housing prices has narrowed.

 

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. Domestic economic growth is expected to remain low, but inflation is projected to 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. Regarding the need to raise the Base Rate further, the Board will make a judgement while thoroughly assessing 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 (May 25, 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.

 

To begin, a look at the changes in external conditions since the April meeting shows that global economic growth has been more favorable than expected, but the growth is projected to slow gradually due to continued restrictive monetary policy stances and banking sector stress in major countries. In the U.S. and the euro area, while labor markets remain robust, consumption and investment have been slowing owing to high inflation and the increase in interest rates. A contraction in credit supply following instability at small and medium-sized banks is likely to further slow the growth. The Chinese economy continues to recover, driven mainly by services consumption, but the manufacturing sector is recovering at a slower pace than expected due to high inventory levels.

 

Inflation in major countries has continued to slow, but the pace of slowdown has been moderate. In the U.S., consumer price inflation declined only by 0.1%p to 4.9% in April from the 5.0% in March. Core inflation has been sticky, staying at around 5.5% to 5.6% since January this year.

 

As for global financial markets, major price variables have been volatile, mainly affected by changes in expectations for the U.S. Federal Reserve’s monetary policy. The U.S. dollar had weakened as the Federal Reserve signaled a potential end to rate hikes, and then has fluctuated substantially since mid-May, influenced by U.S. economic indicators exceeding market forecasts and by U.S. debt ceiling negotiations. Long-term government bond yields in major countries have also increased since mid-May.

 

Looking at the Korean economy, although growth turned positive in the first quarter, it continues to slow weighed down by continued sluggishness in exports and investment. Consumption is recovering, but at a modest pace. Exports have continued to fall and investment growth has been slow due to sluggishness in the IT industry and the limited spillover from the Chinese economic recovery.

 

Concerning inflation, consumer price inflation in April was 3.7%, falling into the 3% range for the first time since February 2022. Although consumer price inflation still remains high, it has continued to slow as previously forecast, with the decline in petroleum product prices widening and prices of processed food products increasing at a slower pace. Short-term inflation expectations have also declined to 3.5% in May from the 3.7% in the previous month. However, core inflation remained unchanged in April from the 4.0% of the previous month as prices of personal services sustained their strong uptrend.

 

As for domestic financial and foreign exchange markets, volatility has heightened since mid-May, affected mainly by global financial market movements. Long-term Korean Treasury bond yields fluctuated within a narrow range, but then have risen along with government bond yields in major countries, and short-term interest rates have also shown a considerable increase. The Korean won to U.S. dollar exchange rate has fluctuated greatly, affected by expectations of an end to rate hikes by the U.S. Federal Reserve, negotiations on the U.S. debt ceiling, and trends in the trade balance.

 

Looking at household debt and the housing market, household loans in the financial sector increased slightly in April while the extent of the decrease in housing prices has narrowed.

 

In addition, the Board has revisited its review of inflation and growth trends, reflecting changes in domestic and external conditions since the February Economic Outlook.

 

GDP growth for this year is projected to be 1.4%, below the February forecast of 1.6%. This downward adjustment is mostly attributable to the fact that the recovery in the IT industry and the impacts of China’s economic reopening are slower than initially anticipated. The Board sees that, from the second half of this year, the trend of growth in the domestic economy is expected to improve gradually, with those external constraints easing somewhat. However, there are high uncertainties related to the timing of a rebound in the IT industry, the degree of the impacts of the Chinese economic recovery, and economic growth in major advanced countries.

 

Consumer price inflation is projected to decline significantly in June and July due to the increasing base effect of global oil prices, and then rise slightly to fluctuate at around 3% until the year-end. Consumer price inflation for this year is expected to be consistent with the February forecast of 3.5%. Core inflation is also expected to decline gradually from May. However, the pace of slowdown in core inflation is projected to be more moderate than previously expected, due to accumulated cost pressures and favorable demand in services. Accordingly, core inflation for this year is projected to be 3.3%, higher than the February forecast of 3.0%. This inflation path is likely to be affected by movements of global oil prices and exchange rates, the degree of economic slowdown at home and abroad, and any further increases in public utility fees.

 

I would like to remind you that the Director General of our Research Department will explain the details of the Economic Outlook this afternoon.

 

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 has continued to slow. The Board therefore judged that it is appropriate to maintain its current restrictive policy stance.

 

All the Board members supported the decision unanimously.

 

Looking ahead, it is forecast that there will be a considerable period of time before inflation stabilizes at the target level and also there still remains uncertainties regarding the pace of core inflation slowdown. 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. In this process, the Board will operate monetary policy in a sophisticated manner while thoroughly assessing several uncertainty factors. These include ① the pace of inflation slowdown, ② the U.S. Federal Reserve’s monetary policy, ③ the timing of the rebound in the IT industry, ④ the domestic impacts of the Chinese economic recovery, and ⑤ financial stability conditions at home and abroad.