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. Inflationary pressure has increased due to the Middle East war, growth has increased more than previously expected, supported by strong exports, and financial stability risks have still remained. However, given the uncertainties surrounding developments in the Middle East and that their spillover effects remain high, the Board judged that it would be appropriate to maintain the current level of the Base Rate while assessing developments in the conflict and their impacts on growth and inflation.
The currently available information suggests that, despite the expansion of AI-related investment, global economic growth is expected to slow and inflationary pressure to increase considerably, due to energy and commodity price hikes and to supply constraints stemming from the Middle East war. In global financial markets, government bond yields rose substantially and the US dollar appreciated, influenced by protracted negotiations between the US and Iran and the possibility of shifts in monetary policy stances in major countries. Stock prices rose sharply, reflecting prospects for growing demand for AI investment and favorable corporate earnings. Looking ahead, the global economy and financial markets will be affected by developments in the Middle East conflict, by the AI investment trend, and by changes in monetary and fiscal policies in major economies and in the trade environment.
The domestic economy has grown significantly, as strong exports and increased investment, led by semiconductors and favorable consumption trends have continued. Employment continued its upward trend in the number of persons employed, even though the pace of increase has moderated, particularly in the service sector. Going forward, the domestic economy is expected to continue its improvement trend, supported by a strong semiconductor sector and the supplementary budget, although the effects of rising commodity prices and supply constraints may increase somewhat. Consequently, the growth rate is forecast at 2.6% for this year, significantly higher than the February projection of 2.0%. There remain both high upside and downside risks along the future path of economic growth related to the degree of expansion in the semiconductor sector and its spillover effects onto domestic demand, developments in the Middle East, and changes in the trade environment.
Consumer price inflation rose considerably to 2.6% in April, driven by a sharp increase in petroleum product prices, while core inflation (excluding food and energy) remained at 2.2%. Short-term inflation expectations among the general public have remained in the upper 2% range. Looking ahead, inflation is expected to increase further, as the spillover effects of higher global oil prices expand and as demand-side pressure stemming from income growth also gradually strengthens. Consequently, consumer prices and core inflation for this year are forecast at 2.7% and 2.4%, respectively, substantially higher than the February projections of 2.2% and 2.1%. 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 extent of cost-pressure transmission, and to the effects of the government’s price stabilization measures.
In financial and foreign exchange markets, high volatility in major price variables continued. Korean Treasury bond yields rose sharply due to concerns about inflation at home and abroad and changes in expectations for monetary policy. The Korean won to US dollar exchange rate, which had declined somewhat, rose back to around 1,500 won, owing to the appreciation of the US dollar and to the net selling of domestic stocks by foreign investors. Stock prices continued their steep upward trend on expectations of improved corporate earnings, while still fluctuating considerably in response to developments in the Middle East. Housing prices in Seoul and its surrounding areas accelerated again and expectations of further increases have also heightened. Household loans continued to grow at a limited pace, although the increase in housing-related loans expanded somewhat more.
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. While inflation is forecast to remain above the target level for a considerable time, economic growth is expected to continue its solid improvement trend, supported by a strong semiconductor sector, despite the impact of developments in the Middle East. Regarding financial stability, it is necessary to continue to pay attention to high exchange rate volatility and to conditions regarding the housing market in Seoul and its surrounding areas and household debt. Therefore, the Board will decide the timing of any rate hikes while assessing the extent of the increase in inflationary pressure, the improvement trend in the domestic economy, and financial stability.
Five Monetary Policy Board members supported the decision to keep the Base Rate unchanged, while two members, Chang Yongsung, and Ryoo Sangdai, voted against the decision, proposing to raise it to 2.75%.
Opening Remarks to the Press Conference (May 28, 2026)
Today, the Monetary Policy Board 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 external conditions, uncertainties related to the war in the Middle East continue to persist. Despite the ongoing negotiations between the US and Iran, it remains difficult to predict how the situation will unfold. Even if they reach a deal to end the war, it is expected to take a considerable period of time for energy supply chains to return to normal and for elevated global oil prices to stabilize.
Accordingly, while inflationary pressure is likely to rise significantly, global economic growth is expected to weaken. In the US, inflation is projected to increase to around 4% as the impact of rising oil prices broadens. Inflation in the euro area and in the United Kingdom is also expected to remain above 3% for a considerable period of time. Growth is expected to slow in most major economies, but the US and some Asian economies are expected to benefit from expanded AI investment and are likely to continue favorable growth trends.
In global financial markets, government bond yields rose sharply and the US dollar appreciated, influenced by protracted negotiations between the US and Iran and by the possibility of shifts in monetary policy stances in major economies. Stock prices rose sharply as prospects for growing demand for AI investment continued.
Next, looking at domestic conditions, growth in the domestic economy has accelerated, supported by a strong semiconductor sector, despite the war in the Middle East. Following a sharp rebound in the first quarter growth rate to 1.7%, exports and investment have continued to grow at a strong pace since April, while consumption has also maintained a favorable trend. Consumer price inflation rose to 2.6% in April driven by a sharp increase in petroleum product prices. Short-term inflation expectations among the general public have remained in the upper 2% range. Core inflation (excluding food and energy) remained unchanged from the previous month at 2.2%, as the spillover effects of the supply shock have not yet become apparent.
In financial and foreign exchange markets, major price variables have remained highly volatile. Korean Treasury bond yields rose sharply due to concerns about inflation at home and abroad and to changes in expectations for monetary policy. The Korean won to US dollar exchange rate declined somewhat and later rose to around 1,500 won, owing to the appreciation of the US dollar and to the large-scale net selling of domestic stocks by foreign investors. Stock prices experienced some correction due to the worsening conflict in the Middle East and to profit-taking by foreign investors, but continued their steep upward trend on expectations of improved corporate earnings. Looking at the housing market and the household debt situation, increases in jeonse leasehold deposit, monthly rent, and housing sale prices in Seoul and its surrounding areas have all expanded due to concerns over supply shortages, while expectations of further price increases have also heightened again. Household loans in the financial sector generally continued to grow at a limited pace, but the increase in housing-related loans expanded somewhat as transaction volumes rose, particularly for low- and mid-priced homes in Seoul and its surrounding areas.
We have also revisited forecasts for growth and inflation to reflect changes in domestic and external conditions since our last Economic Outlook in February. To begin with, the GDP growth rate is projected at 2.6% for this year, significantly exceeding the February forecast of 2.0%. This reflects the assessment that, although the war in the Middle East is expected to lower this year's growth rate by approximately 0.4%p, stronger than expected conditions in the semiconductor sector and the resulting expansion in IT exports are projected to raise growth by 0.7%p. In addition, the government’s supplementary budget and favorable stock market conditions are also expected to boost growth by 0.2%p and 0.1%p, respectively, through increases in consumption and investment.
Next, consumer price inflation is forecast to be 2.7% for this year, substantially exceeding the February forecast of 2.2%, and core inflation is also expected to be 2.4%, considerably above the previous forecast of 2.1%. Although the government's price stabilization measures will help ease upward inflationary pressure, the effects of rising global oil prices are expected to gradually spread to prices of non-petroleum industrial goods and service prices, while demand-side pressure is also likely to become stronger than expected as the improvement in economic conditions continues. However, uncertainty surrounding these growth and inflation projections remains very high, particularly regarding developments in the war in the Middle East and the trajectory of the global semiconductor cycle.
Lastly, I will explain the background to the Base Rate decision, which reflects the above mentioned domestic and external conditions. Inflationary pressure has increased due to the Middle East war, growth has increased more than previously expected, contrary to concerns, and financial stability risks have still remained. However, given the uncertainties surrounding developments in the Middle East and that their spillover effects remain high, the Board judged that it would be appropriate to maintain the current level of the Base Rate while assessing developments in the conflict and their impacts on growth and inflation. Two members, Chang Yongsung and Ryoo Sangdai, voted against the decision to leave the Base Rate unchanged, proposing to raise it to 2.75%.
To explain our decision in more detail, we have significantly revised upward the outlook for both inflation and growth, reflecting the influence of the war in the Middle East and the expansion of the semiconductor sector. It was judged that the future trajectory of inflation and economic growth warrants close monitoring whether it will evolve as currently expected. This was because, for inflation, the extent of the pass-through of supply shocks to inflation could vary significantly depending on developments in the Middle East situation and on movements in global oil prices, while, for growth, it could be significantly affected by the extent and duration of the expansion in the global semiconductor cycle, given the domestic economy’s high dependence on the IT sector. In this regard, the Board judged that it is necessary to pay closer attention to the possibility of an increase in upside risks to inflation. From a financial stability perspective, continued attention should be paid to high exchange rate volatility and to developments in the housing market in Seoul and its surrounding areas. However, rather than raising the Base Rate at this meeting, the Board deemed it appropriate to further assess domestic and external conditions, such as developments in the Middle East and the pace of the expansion in the semiconductor sector, and their impact on domestic inflation and growth.
Finally, I would like to address the future direction of monetary policy. While inflation is forecast to remain above the target level for a considerable time, economic growth is expected to continue its solid improvement trend. Regarding financial stability, it is necessary to remain cautious about risks such as exchange rate volatility and housing prices in Seoul and its surrounding areas and household debt. Taking these factors into account, it is judged necessary to raise the Base Rate at an appropriate time. In this process, the Board will decide the timing and pace of any Base Rate hikes, based on incoming data, assessing the extent of the increase in inflationary pressure, the improvement trend in the domestic economy, and financial stability.