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. With inflation remaining stable, economic growth, while there is still high uncertainty surrounding the economic growth outlook, has shown modest improvement, mainly driven by domestic demand, and movements in housing prices in Seoul and its surrounding areas and in household debt need to be further monitored. The Board, therefore, judged that it is appropriate to maintain the current level of the Base Rate and to assess any changes in domestic and external conditions.

The currently available information suggests that, despite progress made on trade negotiations between the U.S. and major economies, the global economy is expected to gradually slow in growth and experience a divergence in inflation trajectories across countries, as the impact of tariff increases starts to materialize. In global financial markets, long-term U.S. Treasury yields and the U.S. dollar index rose, and then fell due to the heightened expectation of an interest rate cut by the U.S. Federal Reserve. Stock prices in major economies have risen as uncertainty regarding tariff negotiations eased. Looking ahead, the global economy and financial markets will be influenced by developments in trade negotiations between the U.S. and China, by the prospects for product-specific tariffs, and by changes in monetary policies in major economies.

In terms of the domestic economy, despite continued sluggishness in construction investment, growth has improved due to a recovery in consumption and due to a better than expected increase in exports, mainly driven by semiconductors. The increase in the overall number of employed persons has continued, but some major industries, such as manufacturing, have continued to decline. Going forward, domestic demand is expected to sustain a modest recovery, affected by the implementation of a supplementary budget and by an improvement in consumer sentiment. Exports are likely to show favorable movements for some time, but are likely to gradually slow as the impacts of U.S. tariffs expand. Consequently, the growth rate is forecast at 0.9% for this year, slightly above the May forecast of 0.8%. The growth rate for next year is expected to be consistent with the previous forecast of 1.6%. High uncertainty remains along the future path of economic growth concerning trade negotiations between the U.S. and China and concerning the imposition of product-specific tariffs, as well as the pace of recovery in domestic demand.

Inflation has remained stable, with consumer price inflation falling slightly to 2.1% in July, while core inflation (excluding changes in food and energy prices from the CPI) held steady at 2.0%. Short-term inflation expectations among the general public have increased slightly to 2.6% in August from 2.5% in the previous month. Looking ahead, despite rising agricultural, livestock, and fishery prices, inflation is projected to remain at around 2% due to subdued demand-side pressure and due to the stabilization of global oil prices. As a result, consumer price inflation is forecast to be 2.0% for this year, slightly above the May forecast of 1.9%, and core inflation is expected to be consistent with the previous forecast of 1.9%. Next year, consumer price inflation and core inflation are both forecast to be 1.9%, slightly above the previous forecast of 1.8% due to the continuing recovery in consumption. 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.

Financial and foreign exchange markets have generally remained stable. Long-term Korean Treasury bond yields have fluctuated within a narrow range. The upward trend of stock prices has somewhat weakened due to corrective pressure from the increases so far and due to changes in expectations concerning regulatory reforms in the capital market. The Korean won to U.S. dollar exchange rate rose due to expectations that residents’ demand for overseas investment funds would continue. The increase in household loans has significantly lessened, affected by the government’s household debt measures. In Seoul and its surrounding areas, housing price increases and transaction volumes have decelerated, but the expectations for rising housing prices remain high.

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 has shown some improvement in growth, but uncertainties surrounding the future path of economic growth remain high due to U.S. tariff policies, while inflation remains on a stable trajectory. Regarding financial stability, it is necessary to further assess whether it will remain on a sustained path of stability while housing price appreciation in Seoul and its surrounding areas and household debt growth have moderated, and to remain cautious about the possibility of increased exchange rate volatility. 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 domestic and external policy conditions and examining the resulting impact on inflation and financial stability.

Opening Remarks to the Press Conference (August 28 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, despite the progress made on trade negotiations between the U.S. and major economies, the global economy is expected to gradually slow as the impacts of tariff increases start to materialize. In the United States, growth is likely to slow, affected by tariffs on top of sluggish labor market conditions and consumption. The euro area and China are expected to show sluggish growth as the effect of front-loaded exports to the U.S. diminishes, despite their economic stimulus measures, including fiscal expansion.

Regarding global inflation, consumer price inflation in the U.S. has increased to the upper 2% level with the effects of tariffs partly materializing. In the euro area, however, inflation remained stable at around 2%, driven by low demand pressures.

In global financial markets, long-term U.S. Treasury yields and the U.S. dollar index rose, and then fell due to the heightened expectation of an interest rate cut by the U.S. Federal Reserve. Stock prices in major economies sustained their upward trend, led by reduced uncertainty over tariff negotiations and by favorable corporate performance.

Next, looking at domestic conditions, economic growth has somewhat improved. As for demand, private consumption has maintained its upward trend since June, boosted by the supplementary budget and a recovery in economic sentiment, whereas construction investment has remained sluggish. Despite the rise in U.S. tariffs, exports were stronger than expected, supported by the semiconductor and automobile sectors.

Inflation has remained stable, with consumer price inflation falling slightly to 2.1% in July, while core inflation (excluding changes in food and energy prices from the CPI) held steady at 2.0%. Short-term inflation expectations among the general public have increased slightly to 2.6% in August, fromthe previous month.

Financial and foreign exchange markets have generally remained stable. Long-term Korean Treasury bond yields have fluctuated within a narrow range. The upward trend of stock prices has somewhat weakened due to corrective pressure from the increases so far and due to changes in expectations concerning regulatory reforms in the capital market. The Korean won to U.S. dollar exchange rate rose due to expectations that residents’ demand for overseas investment funds would continue.

Looking at the housing market and the household debt situation, following the implementation of the government’s household debt measures, the increases in housing prices and transaction volumes in Seoul and its surrounding areas have slowed, and household loan growth in the financial sector decreased significantly in July. However, as housing prices in high-demand areas of Seoul have continued to rise and expectations of further increases in housing prices persist, it is necessary to pay continued attention to the housing market in Seoul and its surrounding areas.

We have revisited our forecasts for growth and inflation to reflect recent changes in domestic and external conditions since our last Economic Outlook in May. To begin with, the GDP growth rate is forecast at 0.9% for this year, slightly above the May projection of 0.8%. To explain the upward revision in more detail, first, there was a stronger-than-expected recovery, centered on consumption, driven by the implementation of a second supplementary budget and an improvement in economic sentiment. This pushed up the growth rate forecast by about 0.2%p. There were also factors on the export side that added about 0.2%p, such as the semiconductor industry performing better for longer than expected, and auto exports showing a favorable trend, while the average tariff rates, following the conclusion of negotiations at the end of last month, remained largely unchanged from those seen in May. On the other hand, the construction industry was weaker than initially expected, which lowered the growth rate projection by about 0.3%p.

The GDP growth rate for next year is forecast at 1.6%, the same as in May. This reflects expectations of continued improvements in domestic demand, driven by consumption, while considering the possibility that the impact of U.S. tariffs may begin to take effect, leading to a slowdown in exports. However, beyond next year, the growth path is subject to considerable uncertainty regarding the level of product-specific tariffs, including on semiconductors, and developments in the U.S.-China trade negotiations.

Consumer price inflation is forecast to be 2.0% for this year, slightly above the May forecast of 1.9%, and core inflation is expected to be consistent with the previous forecast of 1.9%. The increase in agricultural, livestock, and fisheries products is likely to act as upward pressure, which is likely to be partly offset by the stabilization of international oil prices and subdued demand pressure. Next year, consumer price inflation and core inflation are both forecast to be 1.9%, slightly above the previous forecast of 1.8% due to the continuing recovery in consumption.

Lastly, I will explain the background to the Base Rate decision, which reflects the abovementioned domestic and external conditions. With inflation remaining stable, economic growth, while there is still high uncertainty surrounding the economic growth outlook, has shown modest improvement, mainly driven by domestic demand, and the movements in housing prices in Seoul and its surrounding areas and in household debt need to be further monitored. The Board, therefore, judged that it is appropriate to maintain the current level of the Base Rate and to further assess any changes in domestic and external conditions. One member, Shin Sung Hwan, voted against the decision to leave the Base Rate unchanged, proposing to lower it by 25 basis points.

To explain our decision in more detail, regarding financial stability, overheating of the housing market in Seoul and its surrounding areas and growth in household debt have subsided due to the impact of the government’s household debt measures. However, the pace of stabilization has been somewhat slower compared to periods following past real estate market stabilization measures, as evidenced by the continued high price increases in some areas of Seoul. Under these circumstances, we judged it necessary to keep the policy rate unchanged in order to stabilize expectations of rising housing prices. We also decided on our policy while taking into account the need for coordination with the government’s potential additional real estate stabilization measures, should they be announced. Next, although the economy has continued to grow below its potential and uncertainties surrounding the future growth path remain high, it has shown some signs of improvement partly due to the expansion of fiscal spending. Therefore, the Board judged it is appropriate to maintain its rate cut stance and to decide on the timing of a rate cut after further assessing the development of both downside and upside factors to the economy. Lastly, while the rise in agricultural, livestock, and fisheries product prices are expected to act as an upward factor for inflation, considering the weak demand-side pressures, the Board judged that there will be no significant change in inflation from its stable trend so far. The Board thus judged that it is appropriate to maintain the current level of the Base Rate and to evaluate the changes in domestic and external policy conditions.

Regarding future monetary policy, the Board considers it is 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 uncertainties in economic forecasts remain high and as it is necessary to remain cautious regarding financial stability risks, the Board will determine the timing and the size of any further cuts in the Base Rate based on incoming economic data.