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★Monetary Policy Decision & Opening Remarks to the Press Conference (July 13, 2022)

정책총괄팀 (02-759-4679) 2022.07.13 4170

Monetary Policy Decision

(Statement)


The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 50 basis points, from 1.75% to 2.25%. The Board judges that a pre-emptive policy response to prevent the entrenchment of high inflation is of greater importance for some time as high inflation is continuing and becoming broad-based while short-term inflation expectations are rising sharply, although economic downside risks have increased at home and abroad.


Currently available information suggests that global economic growth has weakened, affected by the prolonged Ukraine crisis, while inflation has remained high. In global financial markets, risk aversion has strengthened due to the acceleration of policy rate hikes in major countries and consequent concerns about economic slowdown. The US dollar has remained strong and stock prices have fallen considerably, while government bond yields in major countries have fluctuated significantly. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected largely by global inflation movements, monetary policy changes in major countries, geopolitical risks, and COVID-19 restrictions in major countries.


The Korean economy has continued to recover. Private consumption has sustained its improvement and sluggishness in facilities investment has eased, while export growth has somewhat slowed. Labor market conditions have continued to improve, with the year-on-year increase in the number of persons employed remaining high. Going forward, while private consumption is likely to sustain its recovery, GDP growth this year is projected to be somewhat below the May forecast of 2.7%, affected by the slowdown in exports owing to weakening of economic growth in major countries. Uncertainties surrounding the economic outlook are judged to be elevated.


Consumer price inflation has risen significantly to 6.0% due to the ongoing sharp rise in the prices of petroleum products and the accelerating price increases in other expenditure categories. Core inflation (excluding changes in food and energy prices from the CPI) and the inflation expectations of the general public have increased to close to 4%. It is forecast that consumer price inflation will remain high at above 6% for some time and run substantially above the May forecast of 4.5% for the year overall. Core inflation is forecast to remain elevated at 4% or higher for a considerable time.


In domestic financial markets, long-term market interest rates have risen considerably, due to expectations about policy rate hikes at home and abroad, while stock prices have fallen sharply driven mainly by concerns about global economic slowdown. The Korean won to US dollar exchange rate has risen significantly, reflecting the global strengthening of the US dollar. Household loans have increased slightly and housing prices have remained steady.


Considering inflation and economic conditions, though economic downside risk is indeed high, uncertainties remain elevated, and thus the Board sees it as important at this time to curb the spread of inflation expectations through a 50-basis-point rate hike to prevent acceleration of inflation. 


The Board will continue to conduct monetary policy in order to stabilize consumer price inflation at the target level over a medium-term horizon as it monitors economic growth, while paying attention to financial stability. The Board sees continued rate hikes as warranted, as inflation is expected to run above the target level for a considerable time. In this process the Board will determine the size and pace of further increase of the Base Rate while thoroughly assessing the trends of growth and inflation, the risk of a buildup of financial imbalances, monetary policy changes in major countries, and external economic conditions including geopolitical risks.


Opening Remarks to the Press Conference


The Monetary Policy Board (MPB) of the Bank of Korea decided today to raise the Base Rate by 50 basis points, from 1.75% to 2.25%. First of all, I would like to tell you that the decision was made with a sense of grave responsibility, since this was the first 50-basis-point rate hike in the Bank’s history, although rate cuts of more than 50 basis points had been made before. I will explain the background to the Base Rate hike in detail after touching upon global and domestic financial and economic conditions.


First, looking at the changes in external conditions since the May MPB meeting, global economic growth has weakened and uncertainties as to the growth path have increased significantly, affected by the prolonged Ukraine crisis and the acceleration of policy rate hikes in major countries, while inflation has exceeded 8% in major countries including the US and those in the euro zone. As risk aversion in global financial markets has strengthened accordingly, the US dollar has remained strong and stock prices have fallen considerably while government bond yields in major countries have fluctuated significantly. 


Despite the worsening external conditions, the Korean economy continued to recover until the first half of this year as originally expected. Private consumption has improved led by face-to-face services industries, and sluggishness in facilities investment has partially eased, while export growth has somewhat slowed. However, GDP growth is projected to be below the May forecast, affected by the slowdown in exports owing to weakening of economic growth in major countries. Uncertainties surrounding the economic outlook are also judged to be elevated.


Concerning inflation, consumer price inflation has risen to the 6% level for the first time since the Asian currency crisis in 1998. Inflation has not only risen significantly but is doing so at a faster pace. It took seven months for inflation to reach the 5% level from the 3% level, but it took only one month to rise from the 5% level to the 6% level. Furthermore, as demand-side pressures as well as supply-side factors have grown, inflation is becoming more broad-based, with 50% of the items composing the consumer price index showing price increases of 5% or higher. As a result, core inflation and the inflation expectations of the general public have increased to almost 4%.


In domestic financial markets, volatility of major price variables has heightened greatly. Long-term market interest rates have risen considerably on the prospect of faster policy rate hikes at home and abroad, and stock prices have fallen sharply driven mainly by concerns about the global economic slowdown. The Korean won to US dollar exchange rate has risen to above 1,300 won, reflecting the global strengthening of the US dollar and net outflows of stock investment funds by Korean nationals and foreigners. Looking at financial stability, household loans in the financial sector increased slightly in June, led by housing-related loans, despite declines in unsecured loans, and housing prices remained steady.


Today, the Monetary Policy Board decided to raise the Base Rate by 50 basis points in consideration of the need for a preemptive policy response to ensure price stability. All MPB members supported the decision unanimously. 


As for a more detailed explanation of the background to the Base Rate hike, just as I mentioned earlier, consumer price inflation at the 6% level is already high, and inflation is getting more broad-based, thus causing negative real interest rates to widen significantly. In addition, there have been growing concerns that high inflation could become entrenched as inflation expectations have been spreading with short-term inflation expectations nearing 4% and wage growth accelerating, and the interaction between inflation and wages has strengthened. The Board thus judged that a policy response to this would be of great importance. Although global economic downside risks had increased, the Board judged that, particularly since there are high uncertainties associated with the Ukraine crisis and the pace of policy rate hikes in major economies, it would be desirable to respond to such risks after further examining external developments and their impacts on the domestic economy.


The Bank of Korea sees it warranted to maintain its stance of Base Rate hikes going forward, as inflation is projected to remain high for some time. With regard to the pace of increase, given today’s preemptive 50bp hike, we believe gradual, 25bp increases will be appropriate for some time, unless domestic prices deviate considerably from our current projection that inflation will gradually decline after running high for several months. However, let me make it clear that the timing and size of our policy response is subject to change if inflation accelerates due to shifts in domestic or overseas conditions, or if the economy slows to a larger extent than expected. We will closely monitor how the Korean financial and FX markets are impacted by currency depreciation and capital outflow pressures in EMEs and the consequent changes in international financial market conditions. 


The Board is well aware that today’s 50bp rate hike could aggravate difficulties for the vulnerable sectors of our economy. However, if we fail to make a timely response now, resulting in the strengthening of the interaction between price and wage and the entrenchment of high inflation, a larger rate hike will be unavoidable later, which could weigh more heavily on the vulnerable sectors as well as the economy as a whole. As for the growing hardship faced by the vulnerable sectors, we will work hard to find targeted support measures in cooperation with the government. One such example is our plan to keep the interest rate at 0.25% for the loans provided to firms affected by COVID-19 under the Bank Intermediated Lending Support Facility, for a maximum of one year even after the program expires at the end of September 2022 as scheduled. The Bank of Korea will also work toward improving the household debt structure, by providing support for the conversion of households’ floating-rate loans to fixed-rate ones. 


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