Monetary Policy Decision
The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 25 basis points from 2.50% to 2.75%. Along with economic growth having strengthened, led by exports and investment, inflation is expected to remain above the target level for a considerable time, and financial stability risks also persist. The Board, therefore, judged that it is appropriate to raise the Base Rate by 25 basis points.
The currently available information suggests that the global economy is expected to continue its moderate growth trend, driven by robust AI investment, despite continued uncertainty surrounding the situation in the Middle East, while inflation is projected to remain elevated for some time as the impact of the rise in energy prices feeds through with a time lag. In global financial markets, the US dollar appreciated and government bond yields rose, influenced by changes in both expectations of rate hikes by the US Federal Reserve and in developments in the Middle East. Stock prices fluctuated considerably in response to changes in the outlook for the AI and semiconductor sectors. Looking ahead, the global economy and financial markets will be affected by developments in the implementation of the US-Iran ceasefire agreement, by the AI investment outlook, and by changes in the monetary and fiscal policies in major economies and in the trade environment.
The domestic economy strengthened further as exports and investment continued to grow strongly, led by the semiconductor sector, and as consumption showed a favorable trend. In terms of employment, the number of persons employed turned to an increase, led by the service sector, while employment continued to decline in major industries such as manufacturing. Going forward, the domestic economy is expected to continue its robust growth as exports and investment sustain their growth at a high level, supported by a strong semiconductor sector, and as the recovery in consumption accelerates on the back of improving income conditions. Accordingly, the growth rate for this year is expected to considerably exceed the May forecast of 2.6%. There remain uncertainties along the future path of economic growth related to the degree of the 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 to 3.2% in June, driven by the ongoing sharp rise in petroleum product prices and by a faster rise in the prices of agricultural, livestock, and fisheries products, while core inflation (excluding food and energy) remained unchanged from the previous month at 2.5%. Short-term inflation expectations among the general public remain in the upper 2% range. Looking ahead, inflation is expected to remain high for a considerable time, despite the decline in global oil prices, as the impacts of heightened costs and the elevated exchange rate persist and as demand-side pressures also gradually strengthen in line with improving income conditions. Accordingly, consumer price inflation for this year is expected to be generally consistent with the May forecast of 2.7%, while core inflation is likely to be somewhat higher than the previous forecast of 2.4%. 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 has increased significantly. The Korean won to US dollar exchange rate rose to the mid-1,500 won range due to outflows of foreign stock investment funds and to US dollar appreciation, but then declined to the upper 1,400 won range as foreign exchange market supply-demand conditions improved. Korean Treasury bond yields rose overall, affected by factors including changes in monetary policy expectations both at home and abroad. Stock prices underwent a sizable correction amid heightened volatility due to growing concerns over AI investment and large-scale net sales of domestic stocks by foreign investors. Household loans increased substantially, with increases in both housing-related loans and in other loans, while the pace of increases in housing prices in Seoul and its surrounding areas accelerated.
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 export and domestic demand are both expected to continue their robust improvement, supported by the spillover effects of a strong semiconductor sector, inflation is forecast to remain above the target level for a considerable time, as elevated cost pressures persist for some time and as demand-side pressure also gradually increases. Regarding financial stability, it is necessary to continue to pay attention to elevated exchange rate volatility and acceleration in both housing prices increases in Seoul and its surrounding areas and in household debt growth. Therefore, it is judged that it will be necessary to continue a policy stance consistent with further rate hikes, and the Board will determine the timing and pace of further increases in the Base Rate while assessing the extent of inflationary pressure, the improvement trend in the domestic economy, and financial stability.
All seven Monetary Policy Board members unanimously supported the decision to raise the Base Rate.
Opening Remarks to the Press Conference (July 16, 2026)
Today, the Monetary Policy Board of the Bank of Korea decided to raise the Base Rate by 25 basis points, from 2.50% to 2.75%. 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 moderate growth trend, supported by sustained robust AI investment. Uncertainty surrounding the situation in the Middle East remains high, with tensions recently escalating again after having eased somewhat following the signing of a memorandum of understanding between the US and Iran. Looking at economic conditions across major economies, the US is expected to maintain growth of around 2% this year, supported by AI investment and consumption. Some emerging economies that are part of the AI supply chain are also expected to maintain favorable growth on the back of strong exports. In contrast, growth in the euro area is projected to remain in the 0% range, reflecting weakening sentiment and reducing purchasing power due to inflation. Although concerns about a sharp rise in inflation have eased amid declining global oil prices, inflation in major economies is expected to remain above target levels for some time as the impact of the rise in energy prices feeds through with a time lag.
In global financial markets, the US dollar appreciated and government bond yields in major economies rose, influenced by changes in both expectations of rate hikes by the US Federal Reserve and in developments in the Middle East. Stock prices fluctuated considerably in response to changes in the outlook for the AI and semiconductor sectors.
Next, looking at domestic conditions, the domestic economy strengthened further as exports and investment continued to grow strongly and as consumption showed a favorable trend. In particular, exports exceeded 100 billion US dollars for the first time ever in June, as exports of IT products continued to record triple-digit growth and non-IT export growth also accelerated. Going forward, the domestic economy is expected to continue its robust growth as exports and investment sustain their growth at a high level, supported by a strong semiconductor sector, and as the recovery in consumption accelerates on the back of the resulting improvement in income conditions. Accordingly, the growth rate for this year is expected to considerably exceed the May forecast of 2.6%.
Consumer price inflation rose to 3.2% in June, driven by the ongoing sharp rise in petroleum product prices and by a faster rise in the prices of agricultural, livestock, and fisheries products, while core inflation (excluding food and energy) remained unchanged from the previous month at 2.5%. Inflation for living necessities, which reflects households’ perceived inflation, increased at a high rate in the mid-3% range, while short-term inflation expectations among the general public remained in the upper 2% range. Looking ahead, inflation is expected to remain above the target for a considerable period of time, as supply-side pressures from the impacts of higher costs and an elevated exchange rate persist and as demand-side pressures also gradually strengthen in line with improving household income conditions. Accordingly, consumer price inflation for this year is expected to be generally consistent with the May forecast, while core inflation is likely to be somewhat higher than the previous forecast.
In financial and foreign exchange markets, the volatility of major price variables has increased significantly. The Korean won to US dollar exchange rate rose to the mid-1,500 won range due to outflows of foreign stock investment funds and US dollar appreciation, but then declined to the upper 1,400 won range as foreign exchange market supply-demand conditions improved. Korean Treasury bond yields rose overall, affected by factors including changes in expectations of the monetary policy both at home and abroad. Stock prices underwent a sizable correction amid heightened volatility. Looking at the housing market and the household debt situation, the pace of increase in housing prices accelerated, particularly in Seoul and major areas in Gyeonggi Province, amid persistently high expectations of further price increases. Household loans in the financial sector continued to increase at a high monthly pace of 8-9 trillion won, driven by sustained growth in housing-related loans and a sharp rise in other loans.
Lastly, I will explain the background to the Base Rate decision, which reflects the above mentioned domestic and external conditions. Along with economic growth having strengthened, led by exports and investment, inflation is expected to remain above the target level for a considerable time, and financial stability risks also persist. The Board, therefore, judged that it is appropriate to raise the Base Rate by 25 basis points. All the Board members unanimously supported this decision.
I will explain the background behind today’s decision to raise the Base Rate in terms of economic growth, inflation, and financial stability.
Starting with growth, given that exports and domestic demand are both expected to continue their robust improvement, supported by the spillover effects of a strong semiconductor sector, the growth rate for this year is expected to considerably exceed the May forecast. Behind the recent strengthening of economic growth is the fact that Korea is benefiting as a key player in the global AI value chain during the process of global AI diffusion. Accordingly, exports and investment are expected to grow strongly, and unprecedented expansion in nominal GDP resulting from the surge in semiconductor prices is likely to support domestic demand through higher corporate profits, increased investment, and gains in wages and tax revenues.
Next, looking at inflation, consumer price inflation is projected to remain above the target level for a considerable time. On the supply side, despite the decline in global oil prices, the spillover effects of heightened costs and the elevated exchange rate will persist for some time. In addition, unlike in some major economies with a weak economic recovery, demand-side inflationary pressures in Korea are expected to gradually increase as the strength of the semiconductor sector will spill over into domestic demand. Consequently, the underlying inflationary pressures are likely to be greater and more persistent than previously expected.
Lastly, financial stability risks also persist. There are concerns that housing prices in Seoul and its surrounding areas will continue to rise sharply, considering that home-buying capacity has expanded due to improved income and asset conditions amid persistent expectations of further price increases. Upward pressure on household loan growth in the financial sector is also likely to persist. In foreign exchange markets, as the exchange rate has been fluctuating widely at a high level, continued attention should be paid to the associated risks.
Taken together, developments in all three areas of growth, inflation, and financial stability support the need for a rate hike. The Board, therefore, judged that it is appropriate to raise the Base Rate by 25 basis points.
Finally, I would like to address the future direction of monetary policy. While economic growth is expected to continue its solid improvement trend, inflation is forecast to remain above the target level for a considerable time, and it is also necessary to be cautious about financial stability risks. The Board thus judged that it will be necessary to continue a policy stance consistent with further rate hikes. In this process, the Board will determine the timing and pace of further 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.
Furthermore, the Board decided to raise the interest rate on programs under the Bank Intermediated Lending Support Facility by 25 basis points, from 1.00% to 1.25%, considering the need to maintain consistency with the monetary policy stance.