[Base Rate 3%] Bank of Korea "Must Continue Rate Hikes... Next Year's Growth Rate Below Forecast"

Prices Maintain High Increase of 5~6% for an Extended Period

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Seo So-jeong] The Monetary Policy Committee of the Bank of Korea emphasized on the 12th that it is necessary to continue the interest rate hike stance as the high inflationary trend persists and additional inflationary pressures and foreign exchange risks are increasing due to the rise in exchange rates, while raising the base interest rate by 0.50 percentage points.

However, the committee plans to carefully assess the extent and pace of future rate hikes by closely monitoring the persistence of high inflation, growth trends, changes in major countries' monetary policies, financial stability including capital inflows and outflows, and geopolitical risks.

In the resolution of the monetary policy direction meeting held on the morning of the same day, the committee stated, "Although the domestic economy is slowing down, it is necessary to continue the interest rate hike stance as inflation is expected to maintain a high upward trend significantly exceeding the target level."

Consumer prices continue to rise at a high rate in the mid-to-high 5% range, as the increase in prices of personal services and processed foods expands despite the slowdown in petroleum prices. Core inflation (excluding food and energy) and expected inflation rates also remain at a high level in the 4% range. Accordingly, the committee expects consumer prices to sustain a high increase in the 5-6% range for a considerable period due to additional inflationary pressures from the rise in exchange rates and other factors.

The committee explained, "The consumer price inflation rate for this year and next year is generally in line with the August forecast (5.2% and 3.7%), but despite downward pressure from economic slowdown, upward risks are significant due to exchange rate increases and production cuts by major oil-producing countries."

The domestic economy has seen a recovery in consumption, but growth has slowed due to a decrease in export growth rates. The committee stated, "Going forward, the domestic economy is expected to gradually slow down due to the global economic slowdown and rising interest rates," adding, "This year's growth rate is generally in line with the August forecast (2.6%), but next year is expected to fall below the previous forecast (2.1%)." It further added, "While monitoring growth trends, monetary policy will be operated with attention to financial stability to ensure that inflation stabilizes at the target level over the medium term."

Meanwhile, the committee decided to raise the loan interest rate for the Financial Intermediation Support Loan permanent support program from 1.25% per annum to 1.50% per annum starting today. However, the loan interest rate for existing loans under the COVID-19 support program for small and medium-sized enterprises and small business owners will be maintained at 0.25% per annum until maturity.