Bank of Korea Raises Base Rate by 0.25 Percentage Points... 6 Consecutive Increases
Inflation Rate to Slightly Decrease but Remain in 5% Range
Domestic Economic Growth Expected to Weaken Next Year... Forecast at 1.7%
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 24th. [Photo by Yonhap News]
The Monetary Policy Committee (MPC) of the Bank of Korea explained on the 24th that the background for raising the base interest rate by 0.25 percentage points was due to "a comprehensive consideration of the expected greater economic slowdown compared to the August forecast, the easing of risks in the foreign exchange sector, and the contraction of the short-term financial market."
It also emphasized that although the domestic economic growth rate is expected to decline next year, inflation is also expected to continue its high upward trend for the time being, so it is necessary to maintain the stance of raising interest rates.
In the resolution of the monetary policy direction meeting held on the morning of the 24th, the Bank of Korea's MPC stated, "We will operate monetary policy while monitoring the growth trend so that the inflation rate can stabilize at the target level in the medium term, and pay attention to financial stability."
Since the rapid interest rate hikes by the U.S. Federal Reserve (Fed) continue and domestic inflation remains unstable, the stance of raising interest rates will be maintained. However, considering the recent tightening of the domestic funding market and the increase in household interest burdens, it is interpreted that the magnitude and pace of rate hikes may be eased.
The MPC explained, "In the international financial market, risk aversion sentiment has somewhat eased due to expectations of the Fed slowing the pace of rate hikes, leading to a weakening of the U.S. dollar and a decline in long-term market interest rates," adding, "Going forward, the global economy and international financial markets are expected to be influenced by international commodity prices and global inflation trends, changes in major countries' monetary policies and U.S. dollar movements, and geopolitical risks."
The MPC forecast that although the domestic economy has maintained a favorable situation with a recovery in consumption and low unemployment rates, growth is expected to weaken significantly in the future. The MPC analyzed, "The domestic economy is expected to weaken in growth due to the global economic slowdown and rising interest rates," adding, "This year's growth rate is expected to align with the August forecast (2.6%), but next year is projected to significantly underperform the previous forecast (2.1%) at 1.7%."
Regarding inflation, it stated, "Consumer prices are expected to see a somewhat lower rate of increase due to base effects and economic slowdown, but a high rise of around 5% is expected to continue for the time being," and explained, "This year's and next year's consumer price inflation rates are projected to slightly underperform the August forecast at 5.1% and 3.6%, respectively, but uncertainties remain large regarding exchange rate and international oil price movements, the degree of domestic and foreign economic slowdown, and the extent of electricity and gas rate hikes."
In the financial and foreign exchange markets, long-term government bond yields and the won-dollar exchange rate declined, and stock prices rose; however, in the short-term financial market, interest rates on project financing asset-backed commercial paper (PF-ABCP) and others rose sharply, and trading contracted, the MPC added.
The MPC stated, "Although the domestic economic growth rate will decline, inflation is expected to continue a high upward trend significantly exceeding the target level, so it is necessary to maintain the stance of raising interest rates for the time being," and added, "In this process, the magnitude and pace of future rate hikes will be carefully judged while closely monitoring the persistence of high inflation, growth trends, changes in major countries' monetary policies, financial stability conditions, and geopolitical risks."
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