Monetary Policy Decision
The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 25 basis points from 2.75% to 3.00%. While the domestic economy has continued to grow at a stronger than expected pace, supported by strong exports and a recovery in domestic demand, inflation is expected to remain above the target level for a considerable time. In this context, it is important to prevent inflationary pressures from becoming widespread through preemptive action, and it is also necessary to continue paying attention to financial stability risks. 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 grow at a moderate pace, driven by robust AI investments, despite continued tensions in the Middle East, while inflation is projected to remain elevated for some time due to the impact of increases in energy prices. In global financial markets, long-term government bond yields rose and the US dollar weakened as concerns about fiscal soundness in major economies grew, amid continued uncertainties surrounding the US Federal Reserve’s monetary policy and the situation in the Middle East. Stock prices generally rose, reflecting favorable corporate earnings, despite concerns over the profitability of global AI investments. 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 and in the trade environment.
The domestic economy maintained strong growth, led by exports and investment. The number of persons employed continued to increase moderately, mainly in the services sector. Going forward, the domestic economy is expected to continue its robust growth as exports and investment sustain their high growth on the back of a strong semiconductor sector and as the recovery in consumption gradually accelerates, supported by improving income conditions. Consequently, the growth rate is forecast at 3.3% for this year and 2.9% for next year, both significantly higher than the May forecasts of 2.6% and 2.1%, respectively. There remain uncertainties along the future path of economic growth related to the degree of expansion in the semiconductor sector and its spillover onto domestic demand, developments in the Middle East, and changes in the trade environment.
Consumer price inflation declined to 2.8% in July due to slower increases in the prices of petroleum products and agricultural, livestock, and fisheries products, while core inflation (excluding food and energy) rose to 2.6%, driven by faster increases in the prices of personal services and durable goods. 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 increase with improving income conditions. Consequently, consumer price inflation is forecast at 2.7% for this year and 2.3% for next year, both consistent with the May projections, while core inflation (excluding food and energy) is forecast at 2.5% for both this year and next year, higher than the May forecasts of 2.4% and 2.3%, 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 has remained high. The Korean won to US dollar exchange rate fell significantly as foreign exchange market supply-demand conditions improved due to a moderation in foreign investors’ stock investment outflows and a weakened US dollar. Korean Treasury bond yields fluctuated considerably, affected by stronger domestic economic growth and by movements in US Treasury bond yields and global oil prices. Stock prices fell sharply, led by the semiconductor sector, and then partially rebounded. Housing prices in Seoul and its surrounding areas continued to increase at a high pace while household loans also increased substantially.
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 continue its robust growth, supported by sustained 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 increasing demand-side pressures. Regarding financial stability, it is necessary to continue to pay attention to acceleration in both housing price increases in Seoul and its surrounding areas and household debt growth. Therefore, the Board will decide the timing and pace of further increases in the Base Rate while assessing the trends in inflation and the domestic economy, as well as financial stability.
Six Monetary Policy Board members supported the decision to raise the Base Rate, while one member, Hwang Kunil, voted against the decision, proposing to keep the Base Rate unchanged at 2.75%.
Opening Remarks to the Press Conference (August 27, 2026)
Today, the Monetary Policy Board of the Bank of Korea decided to raise the Base Rate by 25 basis points, from 2.75% to 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 grow at a moderate pace, driven by robust AI investments, despite continued tensions in the Middle East. Looking at economic conditions across major economies, the US economy is expected to maintain a growth rate above 2% this year, supported by ongoing large-scale investment in AI infrastructure, despite a modest slowdown in employment growth. Some emerging Asian economies that are linked to the AI supply chain are also expected to maintain favorable growth. In contrast, growth in the euro area is projected to be below 1% due to weakness in the manufacturing sector, despite increased fiscal spending in major economies. Although inflation in major economies has recently declined somewhat, it is expected to remain above target levels for some time due to the impact of increases in energy prices.
In global financial markets, long-term government bond yields rose and the US dollar weakened as concerns about fiscal soundness in major economies grew, amid continued uncertainties surrounding the US Federal Reserve’s monetary policy and the situation in the Middle East. Stock prices generally rose, reflecting favorable corporate earnings, despite concerns over the profitability of global AI investments.
Next, looking at domestic conditions, the domestic economy continued to grow at a stronger than expected pace, led by exports and investment. In particular, in the second quarter, there was rapid growth in income resulting from the improvement in the terms of trade.
Consumer price inflation declined to 2.8% in July due to slower increases in the prices of petroleum products and agricultural, livestock, and fisheries products, while core inflation (excluding food and energy) rose to 2.6%, driven by faster increases in the prices of personal services and durable goods. Short-term inflation expectations among the general public remained in the upper 2% range.
In financial and foreign exchange markets, volatility in major price variables has remained high. The Korean won to US dollar exchange rate fell significantly to the upper 1,300 won range as foreign exchange market supply-demand conditions improved due to a moderation in foreign investors’ stock investment outflows and a weakened US dollar. Korean Treasury bond yields fluctuated considerably, affected by stronger domestic economic growth and by movements in US Treasury yields and global oil prices. Stock prices fell sharply, led by the semiconductor sector, and then partially rebounded. Looking at the housing market and the household debt situation, although the pace of increase in housing prices in some parts of Seoul slowed somewhat, overall housing prices in Seoul and its surrounding areas continued to increase at a high pace. Household loans in the financial sector grew at a faster pace than in previous years, with both housing-related loans and other loans increasing.
We have also revisited forecasts for growth and inflation to reflect changes in domestic and external conditions since our last Economic Outlook in May. To begin with, the GDP growth rate is projected at 3.3% for this year and 2.9% for the next year, both significantly higher than the May forecasts. This reflects the assessment that exports and investment are projected to maintain high growth as the semiconductor sector has been stronger than previously expected and that the recovery in consumption is also expected to strengthen, supported by improving income conditions.
Consumer price inflation is forecast to be 2.7% for this year and 2.3% for next year, both consistent with the May projections, as increased demand-side pressures from stronger growth and lower global oil prices offset each other. Core inflation, which is one of the underlying inflation indicators and provides a gauge for the future path of inflation, is projected to be 2.5% for both this year and next year, higher than the May forecasts of 2.4% and 2.3%, respectively, as demand-side pressures stemming from the improvement in income conditions increase more than expected amid the continued pass-through of accumulated cost pressures. These future paths of growth and inflation are judged to be subject to uncertainties related to developments in the Middle East, the expansion of the semiconductor sector, and the extent of its spillover onto domestic demand.
Lastly, I will explain the background to the Base Rate decision, which reflects the above mentioned domestic and external conditions. As the domestic economy has continued to grow at a stronger than expected pace, supported by strong exports and by a recovery in domestic demand, and as inflation is expected to remain above the target level for a considerable time, it is important to prevent inflationary pressures from becoming widespread through preemptive action while it is also necessary to continue paying attention to financial stability risks.
The Board, therefore, judged that it is appropriate to raise the Base Rate by 25 basis points. One member, Hwang Kunil, voted against the decision to raise the Base Rate by 25 basis points, proposing to maintain the Base Rate at the current level of 2.75%.
I will explain in more detail the background to today’s decision to raise the Base Rate, following the hike in July. Most importantly, the domestic economy is expected to grow at a robust pace both this year and next year, supported by a strong semiconductor sector and the subsequent improvement in income conditions. Furthermore, it is judged that, with core inflation remaining at a high level until next year, inflation has become more likely to spread widely and persist for longer. In this context, the Board judged that preemptive monetary policy action is necessary to promote stability in the macroeconomy, including inflation. Most research findings suggest that, compared to a delayed response, preemptive monetary policy action can stabilize inflation expectations at an early stage, thereby reducing the degree and duration of monetary policy tightening and ultimately easing the burden on growth. In addition, preemptive action would also help moderate the recent increases in housing prices in Seoul and its surrounding areas and the growth in household debt.
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, thus, will determine the timing and pace of further Base Rate hikes based on incoming data.
Meanwhile, the Board decided to leave the interest rate on programs under the Bank Intermediated Lending Support Facility unchanged at 1.25%, while raising the Base Rate. This, together with the government’s support measures, is expected to contribute to easing the financial burden on small and medium-sized enterprises (SMEs).