Monetary Policy Decision
The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 2.50% for the intermeeting period. Economic growth is forecast to remain low for some time and there is high uncertainty related to trade negotiations, while the inflation rate remains broadly stable. However, as it is also necessary to assess the impact of the recently strengthened measures for household debt management and given the significant acceleration in housing prices in Seoul and its surrounding areas and household debt, the Board judged that it is appropriate to maintain the current level of the Base Rate.
Currently available information suggests that the global economy is expected to experience a gradual slowdown in growth and a divergence in inflation trajectories across countries as the impact of high tariff rates starts to materialize amid prolonged uncertainties surrounding the trade environment. In global financial markets, stock prices in major countries have risen significantly as risk-off sentiment has weakened due to easing tensions in the Middle East and due to some progress having been made in trade negotiations between the U.S. and China. Long-term U.S. Treasury yields have slightly declined on expectations that the U.S. Federal Reserve will resume interest rate cuts, and the U.S. dollar has continued to weaken. Looking ahead, the global economy and financial markets will be influenced by the results of tariff negotiations between the U.S. and major countries, as well as by changes in monetary policies in major economies.
In terms of the domestic economy, the sluggishness in growth has somewhat eased as consumption has improved due to the resolution of domestic political uncertainty and export growth has continued, although the decline in construction investment has persisted. The increase in the overall number of employed persons has expanded, but some major industries, such as manufacturing, have continued to see a decline in employment. Going forward, consumption is expected to gradually recover due to an improvement in economic sentiment and the supplementary budget, while exports are projected to slow due to the impact of U.S. tariffs. However, the future path of economic growth faces significant uncertainties concerning developments in trade negotiations with the U.S. and concerning the pace of recovery in domestic demand.
Consumer price inflation rose to 2.2% in June, driven by a sustained increase in the prices of processed food products and by the base effect from the prices of agricultural and petroleum products. However, core inflation remained unchanged from the previous month at 2.0% while short-term inflation expectations fell to 2.4% from 2.6% in the previous month. Going forward, inflation is expected to remain at around 2%, driven by subdued demand pressures and by the stabilization in global oil prices. Consequently, both headline and core inflation for this year are also expected to be generally consistent with the previous forecasts of 1.9%. The future path of inflation is likely to be affected by economic conditions at home and abroad, by movements in exchange rates and in global oil prices, and by the government's price stabilization measures.
In financial and foreign exchange markets, stock prices have risen sharply on improved investor sentiment, supported by expectations of regulatory reforms in the capital market. Long-term Treasury yields have increased due to the possibility of expanded government bond issuance. The Korean won to U.S. dollar exchange rate has fluctuated significantly in the mid- to upper 1,300 won range, influenced by developments in trade negotiations and geopolitical risks. It is expected to remain highly volatile going forward. The housing market in Seoul and its surrounding areas, which had previously shown signs of overheating, appears to be stabilizing somewhat following the implementation of the government’s household debt measures. Meanwhile, the housing market in the rest of the country has remained sluggish. Household loans have continued to grow at a high pace, reflecting the recent increase in housing transactions.
The Board will continue to conduct monetary policy in such a way as 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. The domestic economy is expected to experience continued low growth for some time, while inflation remains on a stable trajectory, and there is considerable uncertainty related to trade negotiations. Regarding financial stability, as risks associated with the housing market in Seoul and its surrounding areas and with household debt have increased, it is necessary to assess the effect of the macroprudential policies while remaining cautious about the possibility of heightened volatility in the foreign exchange market. Therefore, the Board will maintain its rate cut stance to mitigate downside risks to economic growth and adjust the timing and pace of any further Base Rate cuts while closely monitoring changes in the domestic and external policy environments and examining the resulting impact on inflation and financial stability.
Opening Remarks to the Press Conference (July 10, 2025)
Today, the Monetary Policy Board (MPB) of the Bank of Korea decided to leave the Base Rate unchanged at 2.50%. I will first go over economic conditions at home and abroad, and then explain the background to today’s Base Rate decision.
Starting with changes in external conditions, the global economy is expected to experience a gradual slowdown as the impact of high tariff rates starts to materialize amid prolonged uncertainties surrounding the trade environment.
In the United States, the economic growth rate is projected to temporarily rise in the second quarter due to front-loaded demand resulting from the imposition of tariffs, but the growth trend is expected to slow in the second half of the year. In the euro area and in China, despite economic stimulus measures, such as fiscal expansion, growth is anticipated to remain modest due to the impact of trade conflicts with the United States.
Regarding global inflation, CPI inflation in the U.S. is gradually declining, but there remains considerable uncertainty over the future path due to the potential pass-through effects of tariffs. In the euro area, inflation is projected to remain stable, below 2%, reflecting low demand pressures and the strength of the euro.
In global financial markets, despite the continued uncertainty surrounding U.S. tariff policies, stock prices in major countries have risen significantly as risk-off sentiment has weakened due to some progress in trade negotiations between the U.S. and China and easing tensions in the Middle East. Long-term U.S. Treasury yields have slightly declined due to expectations that the U.S. Federal Reserve will resume interest rate cuts, and the U.S. dollar has continued to weaken.
Next, looking at domestic conditions, sluggishness in growth has somewhat eased as consumption has improved and export growth has continued, although the decline in construction investment has persisted. Private consumption, which had declined in the first quarter, appears to have turned to an increase in the second quarter as economic sentiment has improved following the resolution of domestic political uncertainties. Exports were stronger than expected, supported by the solid performance of semiconductor exports.
Going forward, consumption is expected to recover gradually due to an improvement in economic sentiment and the effects of the supplementary budget, while exports are projected to slow due to the impact of U.S. tariffs. However, the future path of economic growth faces significant uncertainties concerning developments in trade negotiations with the U.S. and the pace of recovery in domestic demand. In particular, the path of exports and overall economic growth may vary considerably depending on the outcome of trade negotiations between the United States and major economies, including Korea. The most important factor will be the level at which reciprocal tariffs are set for Korea and sectoral tariffs, including those on semiconductors. However, the tariff levels imposed on key competitors, such as China, as well as those applied to Korea’s major overseas production bases like Vietnam, Mexico and Canada, must also be considered. This is because, if trade negotiations between most countries and the U.S. break down and countries such as China and the EU respond with retaliatory tariffs, the indirect spillover effects through these countries could exceed the direct impact of tariffs imposed on Korea. Accordingly, we plan to provide updated growth projections in August after closely examining how reciprocal tariffs and sectoral tariffs are finally determined, as well as assessing the effects of improved economic sentiment and the implementation of the supplementary budget.
Domestic inflation has continued to hover around 2%. Consumer price inflation rose to 2.2% in June, driven by the sustained increase in the prices of processed food products and the base effect of the prices of agricultural and petroleum products. However, core inflation remained unchanged from the previous month at 2.0%, while short-term inflation expectations fell to 2.4% from 2.6% in the previous month. Going forward, inflation is expected to remain at around 2%, driven by subdued demand pressures and the stabilization of global oil prices. Consequently, both headline and core inflation for this year are also expected to be generally consistent with the previous forecasts of 1.9%.
In financial and foreign exchange markets, stock prices have risen sharply on improved investor sentiment, supported by expectations of regulatory reforms in the capital market. Long-term Treasury yields have increased due to the possibility of expanded government bond issuance. The Korean won to U.S. dollar exchange rate has fluctuated significantly in the mid- to upper 1,300 won range, influenced by developments in trade negotiations and geopolitical risks. It is expected to remain highly volatile going forward.
The housing market had shown signs of overheating, as apartment prices in Seoul surged and transaction volumes rose significantly. However, following the implementation of the government’s household debt measures, the market has shown some signs of stabilization. Growth in household loans in the financial sector is maintaining its strong upward trend and is expected to accelerate further for the time being, reflecting the lagged effects of the earlier increase in housing transactions.
Lastly, I will explain the background to the Base Rate decision, which reflects the abovementioned domestic and external conditions. Economic growth is forecast to remain low for some time, and there is high uncertainty related to trade negotiations, while the inflation rate remains broadly stable. However, as it is also necessary to assess the impact of the recently strengthened measures for household debt management, given the significant acceleration in housing prices in Seoul and its surrounding areas and household debt, the Board judged that it is appropriate to maintain the current level of the Base Rate. All the Board members unanimously supported this decision.
To explain our decision in more detail, above all, the most notable change in the policy environment since the May meeting is that, from a financial stability perspective, concerns over financial imbalances have become more pronounced as the housing market has significantly overheated in Seoul and its surrounding areas and as the pace of household debt growth has accelerated. Under these circumstances, there is a need to mitigate the overheating sentiment in the housing market by preventing excessive expectations of easing by maintaining the Base Rate.
Moreover, as the government recently introduced household debt measures, it is considered appropriate to monitor their effectiveness. There are both upside and downward risks to economic growth, with the supplementary budget posing an upside risk and the U.S. tariff policies posing a downside risk. In particular, it is deemed appropriate to examine developments in the three additional weeks of negotiations expected to conclude at the end of July and to respond as necessary, as they could have a significant impact on the economic growth path. While the possibility of renewed geopolitical risks cannot be entirely ruled out, inflation is expected to remain on a stable path, considering subdued demand pressures. The Board thus judged that it is appropriate to maintain the current level of the Base Rate and to evaluate the impact of the government’s household debt measures and the changes in domestic and foreign policy conditions, such as the development of trade negotiations.
Regarding future monetary policy, the Board considers it necessary to continue its rate cut stance, given that inflation remains broadly stable and economic growth is forecast to remain low for the time being. However, as financial stability risks have risen sharply in the short term and as uncertainties in economic forecasts remain high concerning fiscal and tariff polices, the Board will determine the timing and the size of further cuts of the Base Rate based on incoming economic data.