Monetary Policy Decision
The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 3.00% for the intermeeting period. The domestic economy maintained strong growth led by exports and investment, inflation remains high at around 3%, and financial stability risks persist. However, given the growing uncertainties surrounding the Middle East conflict and monetary and fiscal policies in major economies, the Board judged that it would be necessary to assess developments in both domestic and external risk factors and the effects of the two prior rate hikes while maintaining the current level of the Base Rate.
The currently available information suggests that the global economy is expected to continue its favorable growth trend driven by robust AI investment, despite intensified tensions in the Middle East, while inflation is projected to remain elevated for some time due to the increases in energy prices and supply chain constraints. In global financial markets, long-term government bond yields rose significantly due to increases in inflation, heightened expectations of rate hikes in major economies, and concerns over fiscal soundness and the supply of AI-related corporate bonds, and the US dollar also strengthened. Stock price volatility increased reflecting concerns over the slowdown in AI investment, despite continued strong growth in corporate earnings. Looking ahead, the global economy and financial markets will be affected by developments in the Middle East, by the AI investment outlook, and by changes in monetary and fiscal policies in major economies, including in the US.
The domestic economy continued to grow at a higher than expected pace, led by strong exports and investment. The number of persons employed continued to increase moderately, mainly in the services sector. Going forward, exports and investment are expected to sustain their high growth, driven by a strong semiconductor sector, while the recovery in consumption is likely to gradually accelerate, supported by improving income conditions. Accordingly, the growth rates for this year and next year are expected to be considerably higher than the August forecasts of 3.3% and 2.9%, respectively. There remain uncertainties along the future path of economic growth related to developments in the Middle East, the degree of expansion in the semiconductor sector and its spillover onto domestic demand, and changes in domestic and global financial conditions.
Both consumer price inflation and core inflation (excluding food and energy) continued to increase at high rates in the upper 2% range in September, at 2.9% and 2.8%, respectively. Short-term inflation expectations among the general public remained in the upper 2% range. Looking ahead, inflation is expected to remain above the target level for a considerable time as the pass-through of elevated cost pressures persists and as demand-side pressures also gradually strengthen. Consumer price inflation and core inflation for this year are expected to be generally consistent with the August forecasts of 2.7% and 2.5%, respectively, while those for next year are expected to exceed the previous forecasts of 2.3% and 2.5%, respectively. The future path of inflation is judged to be subject to high uncertainties related to movements in global oil prices and the exchange rate, to the pace of the recovery in domestic demand, and to the extent of the broadening of the increase in wages.
In financial and foreign exchange markets, volatility in major price variables increased. Despite the US dollar’s strength, the Korean won to US dollar exchange rate fell significantly, as foreign exchange market supply-demand conditions improved, supported by a large current account surplus. Korean Treasury bond yields rose considerably, driven by escalated tensions in the Middle East, increases in global oil prices, and surges in government bond yields in major economies, but much of the increase was subsequently reversed due to expectations of improved supply-demand conditions for Korean Treasury bonds. Stock prices fell sharply due to concerns over slowing profitability in the semiconductor sector. Household loans turned to a decline as other loans recorded net repayments, while housing-related loans continued to increase and the pace of increase in housing prices in Seoul and its surrounding areas accelerated again.
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. The domestic economy is expected to maintain its high growth rate, supported by continued strong exports and investment, and by a strengthening recovery in consumption, while inflation is projected to remain above the target level for a considerable time, driven by the pass-through of accumulated cost pressures and by increasing demand-side pressures. Regarding financial stability, it is necessary to continue to pay attention to the financial imbalance risks related to the housing market in Seoul and its surrounding areas and to household debt. Therefore, the Board will decide the timing and pace of further increases in the Base Rate while assessing trends in inflation and the domestic economy, as well as financial stability.
All seven Monetary Policy Board members unanimously supported the decision to keep the Base Rate unchanged.
Opening Remarks to the Press Conference (October 22, 2026)
Today, the Monetary Policy Board of the Bank of Korea decided to leave the Base Rate unchanged at 3.00%. I will first go over economic conditions at home and abroad, and then explain the background to today’s Base Rate decision.
Starting with external conditions, the global economy is expected to continue its favorable growth trend, driven by robust AI investment, despite intensified tensions in the Middle East. Looking at economic conditions across major economies, the US economy is expected to grow at a rate above 2% this year, supported by continued expansion in AI investment and resilient consumption. Some emerging Asian economies that are linked to the AI supply chain are also expected to maintain favorable growth. Growth in the euro area is projected to be around 1%, supported by increased spending on defense and AI infrastructure, despite weakness in the manufacturing sector. Inflation in major economies is expected to remain elevated due to the impact of increases in energy prices and supply chain constraints.
In global financial markets, long-term government bond yields rose significantly as concerns over fiscal soundness and the supply of AI-related corporate bonds grew amid heightened inflation risk and corresponding growing expectations of rate hikes in major economies, and the US dollar also strengthened. Stock price volatility increased reflecting concerns over the sustainability of AI investment, despite continued strong growth in corporate earnings.
Next, looking at domestic conditions, the domestic economy continued to grow at a stronger than expected pace, led by exports and investment. In particular, exports in September reached a record high of over 120 billion US dollars as IT exports continued to record triple-digit year-on-year growth and as growth in non-IT exports also accelerated. Accordingly, this year, customs-based exports are projected to exceed 1 trillion US dollars and the current account surplus is expected to surpass the August forecast of 450 billion US dollars. Investment has also continued to grow strongly, led by semiconductor-related sectors. While consumption has temporarily slowed mainly due to a correction in stock prices and strikes at automakers, it is generally assessed to continue its modest recovery. Going forward, the domestic economy is expected to continue its strong growth. Exports and investment are projected to sustain their high growth, driven by robust expansion in the semiconductor sector, while the recovery in consumption is likely to gradually accelerate, supported by improving income conditions. Accordingly, the growth rates for both this year and next year are expected to be considerably higher than the August forecasts.
Consumer price and core inflation (excluding food and energy) remained elevated in September at 2.9% and 2.8%, respectively, driven mainly by increases in the prices of durable goods and personal services. Short-term inflation expectations among the general public remained in the upper 2% range. Looking ahead, inflation is expected to remain above the target level for a considerable time, as the pass-through of cost pressures from the rebound in oil prices and increases in semiconductor prices strengthens despite a decline in the exchange rate and as demand-side pressures also gradually increase. Accordingly, consumer price inflation and core inflation for this year are expected to be generally consistent with the August forecasts, while those for next year are expected to exceed the forecasts.
In financial and foreign exchange markets, volatility in major price variables increased. Despite the US dollar’s strength, the Korean won to US dollar exchange rate fell significantly, owing to improved foreign exchange market supply-demand conditions resulting from a large current account surplus and a shift in the monetary policy stance. Korean Treasury bond yields rose considerably due to an increase in global oil prices following a renewed escalation of tensions in the Middle East and a surge in government bond yields in major economies, but much of the increase was subsequently reversed due to expectations of improved supply-demand conditions for Korean Treasury bonds. Compared with those in major economies, increases in Korean Treasury bond yields were relatively limited, supported by robust macroeconomic and fiscal conditions. Stock prices fluctuated in response to developments in the Middle East and the outlook for global AI investment, and then underwent a sizable correction due to concerns over slowing profitability in the semiconductor sector. Looking at household debt and the housing market, household loans in the financial sector declined overall as other loans recorded net repayments, while housing-related loans continued to increase. The pace of increase in housing prices accelerated again, particularly among lower- and mid-priced homes in Seoul and in some parts of Gyeonggi Province.
Lastly, I will explain the background to the Base Rate decision, which reflects the above mentioned domestic and external conditions. The domestic economy maintained strong growth led by exports and investment, inflation remains high at around 3%, and financial stability risks persist. However, given the growing uncertainties surrounding the Middle East conflict and monetary and fiscal policies in major economies, the Board judged that it would be necessary to assess developments in both domestic and external risk factors and the effects of the two preemptive rate hikes while maintaining the current level of the Base Rate.
All the Board members unanimously supported this decision.
To explain our decision in more detail, while strong growth and inflation persist and while continued attention should be paid to financial stability, there remain high uncertainties surrounding the Middle East conflict, monetary and fiscal policies in major economies, and changes in US policy after the midterm elections. Therefore, rather than taking action at this time, the Board judged that it is necessary to further monitor the developments of these external uncertainties. Domestically, although the upside risks to growth and inflation appear to have increased compared with the time of the August forecasts, it was considered that it would not be too late to further assess these through incoming data, such as Q3 GDP and October inflation data. In addition, as the effects of preemptive rate hikes are being transmitted smoothly through financial markets, it is also necessary to examine the effects on growth and inflation trends, as well as on financial stability. Lastly, as concerns over increases in global long-term bond yields and the sustainability of AI investment persist, we also have to assess their developments and impacts on the domestic economy. In this regard, the Board judged that it is appropriate to leave the Base Rate unchanged this time and examine growth, inflation, and financial stability more closely.
Finally, I would like to address the future direction of monetary policy. While the domestic economy is expected to continue its robust growth, inflation is forecast to remain above the target level for a considerable time, and it is also necessary to remain cautious about financial stability risks. The Board, therefore, sees it warranted to continue its policy response until there is confidence that inflation will converge stably to the target level, and will determine the timing and pace of further Base Rate hikes while closely monitoring incoming data.