Monetary Policy Decision

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 2.75% to 2.50%. Although concerns about household debt growth and an increase in volatility of foreign exchange markets still persist, the economic growth rate is forecast to decline considerably, while the inflation rate remains broadly stable. The Board, therefore, judged that it is appropriate to cut the Base Rate and mitigate downward pressure on the economy.

The currently available information suggests that the global economy is expected to experience a slowdown in growth due to increased tariff rates, despite a partial easing of global trade tensions, and uncertainty surrounding the inflation path remains elevated. In global financial markets, stock prices rebounded as the previously heightened risk-off sentiment eased. However, continued U.S. policy uncertainties and concerns over fiscal deficits have led to a rise in long-term U.S. Treasury yields, and the U.S. dollar index rose slightly but later retreated. Looking ahead, the global economy and financial markets will be influenced by ongoing tariff negotiations between the U.S. and major economies, by changes in monetary policies in major economies, and by developments in geopolitical risks.

The domestic economy continued its sluggish pace in April, following a contraction in the first quarter due to a slower recovery in domestic demand, including consumption and construction investment, and due to decelerating exports growth. The increase in the overall number of employed persons has continued, but some major industries, such as manufacturing, have continued to see a decline in employment. Going forward, domestic demand is expected to recover modestly, but at a slower pace, while exports are expected to slow further due to the impact of U.S. tariffs. Consequently, the GDP growth rate is forecast at 0.8% for this year, considerably below the February projection of 1.5%. The future economic growth trajectory is assessed to be subject to significant uncertainty, stemming from developments in trade negotiations, government stimulus measures, and monetary policies in major economies.

Inflation has remained stable, with both headline and core CPI inflation recording 2.1% in April. Short-term inflation expectations have fallen to 2.6% in May, from 2.8% in the previous month. Going forward, inflation is expected to remain stable at around 2%, as upward pressure from the price increases in processed food products and services is likely to be offset by declining global oil prices and subdued demand pressure. As a result, CPI inflation is forecast to be consistent with the February forecast of 1.9% for this year, and core inflation is expected to be 1.9%, slightly above the previous forecast of 1.8%. The future path of inflation is likely to be affected by economic conditions at home and abroad, by movements in exchange rates and global oil prices, and by the government's price stabilization measures.

In financial and foreign exchange markets, key indicators have fluctuated in response to external factors such as tariff negotiations between the U.S. and major economies. The Korean won to U.S. dollar exchange rate has declined amid continued high volatility, mainly affected by eased trade tensions and by an appreciation in Asian currencies. Long-term Treasury yields have rebounded in response to rising U.S. long-term interest rates, but the extent of the increase has been relatively limited compared to major countries. Stock prices have risen as concerns over corporate earnings have alleviated. Housing prices have continued to rise in Seoul, while they have declined across regions in the rest of the country. Household loan growth has expanded due to the increase in housing transactions during February and March.

The Board will continue to conduct monetary policy in such a way as 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 see a marked slowdown in growth this year, even as inflation remains on a stable trajectory. Uncertainty surrounding the future growth path also remains elevated. Regarding financial stability, it is necessary to remain cautious about the possibility of an acceleration in household debt growth under continued accommodative monetary conditions, as well as heightened volatility in the foreign exchange market. 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 the domestic and external policy environments and examining the resulting impact on inflation and financial stability.

Opening Remarks to the Press Conference (May 29, 2025)

Today, the Monetary Policy Board (MPB) of the Bank of Korea decided to lower the Base Rate by 25 basis points, from 2.75% to 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, global economic activity is expected to experience a slowdown in growth due to the increased tariff rates, despite the partial easing of global trade tensions. In the U.S., although concerns of an economic recession have subsided following progress on trade negotiations with China, annual growth is projected to decline significantly as the effects of tariff policies gradually feed through into the economy. The euro area and China are also likely to post modest growth due to trade friction with the U.S., despite economic stimulus measures, including fiscal expansion.

The global inflation path continues to face elevated uncertainty. Although U.S. CPI inflation declined to 2.3% in April, inflation is expected to rise gradually as the impact of newly imposed tariffs is reflected. Accordingly, the Federal Reserve is expected to keep the federal funds rate on hold for longer than previously anticipated. In the euro area, despite some upward pressures from increased fiscal spending, inflation is likely to remain subdued due to moderate demand-side pressures and stabilized oil prices. 

In global financial markets, stock prices rebounded as the previously heightened risk-off sentiment eased. However, continued U.S. policy uncertainties and concerns over fiscal deficits led to a rise in U.S. long-term Treasury yields, and the U.S. dollar index rose slightly, but later retreated.

Looking at domestic conditions, the domestic economy continued its sluggish pace in April, following a contraction in the first quarter. Private consumption continued to be sluggish, as prolonged domestic uncertainty delayed the recovery in economic sentiment. Construction investment declined more sharply than expected because of the downturn in the real estate sector, coupled with temporary factors such as safety-related incidents. Regarding exports, semiconductors maintained solid performance, while non-IT sectors, such as petrochemicals and steel, remained weak due to weakening global competitiveness and worsening trade conditions. 

Inflation has remained stable, with both headline and core CPI inflation recording 2.1% in April. Short-term inflation expectations have fallen to 2.6% in May from the previous month. 

In financial and foreign exchange markets, the key indicators have fluctuated in response to external factors, such as tariff negotiations between the U.S. and major economies. The Korean won to U.S. dollar exchange rate fell due to eased trade tensions and market expectations of bilateral currency discussions between the U.S. and Asian countries. Long-term Treasury yields have rebounded in response to rising U.S. long-term interest rates, but the extent of the increase has been relatively limited compared to major countries. Stock prices have risen as concerns over corporate earnings alleviated. 

Looking at the housing market and the household debt situation, household loan growth has expanded due to the increase in housing transactions during February and March. Housing transactions have been slowing somewhat after the redesignation of the “Areas Subject to Permission of Land Transaction” regulations. However, as housing prices have continued to increase in Seoul and the possibility of increased preemptive demand is high ahead of the tightening DSR regulations, it is necessary to pay continued attention to the housing market and household debt trends. 

We have also revisited our forecasts for growth and inflation to reflect recent changes in domestic and external conditions since our last Economic Outlook in February. 

First, the GDP growth rate is forecast at 0.8% for this year, considerably below the February projection of 1.5%. Although trade negotiations between the U.S. and China have recently made progress and the government’s supplementary budget was approved, we still revised down our growth projection by 0.7%p, which is largely attributed to construction investment. Even with construction investment accounting for around 14% of GDP, its sharper-than-expected decline due to a worsening slump in the construction business led to lowering the overall growth rate projection by 0.4%p. Next, although we expect private consumption to recover gradually, consumption was weak in the first quarter and the recovery momentum in the second quarter is expected to be slower than previously expected, which acted to push down the growth rate forecast by 0.15%p. Concerning exports, U.S. tariff rates, which are higher than our baseline projections in February, significantly increased the extent of the export slowdown, acting to reduce the growth rate projection by an additional 0.2%p. In February, we assumed that tariff rates of 5% to 10% would be imposed on countries with a trade surplus with the U.S. However, tariffs of at least 10% have now been applied to all U.S. trading partners and tariff rates on China remain higher than in February. In consideration of these factors as a whole, we project the growth rate for this year to be 0.8%, but uncertainties surrounding the growth path are still high and there are both upside and downside risk factors. Upside factors include the possibility of a swift and smooth conclusion of trade negotiations between the U.S. and major economies, as well as the new government’s economic stimulus measures after the presidential election. In contrast, the prolonged trade conflicts and the imposition of additional tariffs by item could pose downside risks. 

On the other hand, inflation for this year is expected to be broadly in line with our previous expectations. Upward pressure from the price increases in processed food products and services is likely to be offset by declining global oil prices and subdued demand pressure. As a result, CPI inflation is forecast to be consistent with the February forecast of 1.9% for this year, and core inflation is expected to be 1.9%, slightly above the previous forecast. The future path of inflation is likely to be affected by economic conditions at home and abroad, by movements in exchange rates and global oil prices, and by the government's price stabilization measures. 

Lastly, I will explain the background to the Base Rate decision, which reflects the abovementioned domestic and external conditions. 

Although concerns about household debt growth and an increase in volatility of foreign exchange markets still persist, inflation stabilization has continued and the economic growth rate is forecast to decline significantly. The Board, therefore, judged that it is appropriate to cut the Base Rate and mitigate downward pressure on the economy. All the Board members unanimously supported this decision. 

Given that growth for this year is expected to weaken significantly, an additional rate cut has been made to support the economy. Domestic demand is expected to recover modestly, but at a slower pace, while exports are expected to slow further. Consequently, the negative output gap is likely to grow. Inflation is expected to remain stable. Although there are upward price movements in some items, inflation is expected to remain around 2% since oil prices are stable and demand-side pressures are not significant. In terms of financial stability, it is necessary to remain cautious about the possibility of an acceleration in household debt growth under continued accommodative monetary conditions, as well as heightened volatility in the foreign exchange market. Foreign exchange market risks have somewhat eased recently, but exchange rate volatility may increase further amid the possibility of a wider Korea-U.S. interest rate differential due to the slower pace of rate cuts by the Fed, as well as heightened external uncertainties related to U.S. tariff policies and concerns over the fiscal sustainability in major economies. Moreover, household debt must be closely monitored on an ongoing basis, taking the impact of an accommodative monetary stance into account.

Regarding future monetary policy, given the deteriorating economic outlook, future rate cuts could be larger than previously assumed. However, the Board will determine the timing and the pace of further cuts to the Base Rate based on incoming economic data since there are both upside and downside risk factors in economic forecasts, and it is necessary to be cautious regarding financial stability risks.

Finally, the Board decided to lower the interest rate on programs under the Bank Intermediated Lending Support Facility from 1.25% to 1.00% in order to enhance support for vulnerable small and medium-sized enterprises (SMEs) experiencing difficulties.