Inflation Targeting

  1. Monetary Policy
  2. Monetary Policy Framework
  3. Inflation Targeting

Inflation targeting is the monetary policy regime adopted by the Bank of Korea. This is the monetary policy framework focusing on ‘inflation’ itself as the ultimate goal and aiming to achieve its goal over the mid-term horizon, instead of setting intermediate targets such as money supply.

Based on Article 6, Clause 1 of the 「Bank of Korea Act」, the Bank of Korea sets the mid-term inflation target in consultation with the Ministry of strategy and finance. The inflation target for 2016 onwards has been set at 2percent, as measured by the year-on-year change in the Consumer Price Index (CPI). The Bank of Korea conducts monetary policy to maintain the annual rate of CPI inflation near the target over a mid-term horizon.

The Bank of Korea publishes its 「Monetary Policy Report」, a statutory report submitted to the National Assembly, four times a year to explain how it is implementing the inflation target policy. If inflation deviates from the target by more than 0.5 percentage point in either direction for six consecutive months, the Bank of Korea will explain the reasons for the deviations, the prospect for inflation, the monetary policy strategy towards returning inflation to the target, etc., through various means, such as a Governor’s press conference. If inflation subsequently remains more than 0.5 percentage point above or below the target, the Bank of Korea provides further explanations every three months.

The current inflation target has been set for the period from 2016 to 2018. The next target will be set before this target expires at the end of 2018. If adjustment of the inflation target becomes necessary, due for instance to unexpected economic shocks at home or abroad or to changes in economic conditions, the Board will adjust the target in consultation with the Ministry of strategy and finance.

The inflation target and inflation rates

This is an example graph that shows the trend of inflation target and inflation target price index (target inflation rate compared to the inflation target (range) in the Bank of Korea). Rise, consumer price, price stabilization, 3%, and inflation target are 2%.