FOMC: "Inflation slowdown trend continues... This year's growth rate below 1.6%"

Bank of Korea Monetary Policy Committee Holds Base Interest Rate Steady at 3.5%

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 11th. (Photo by Bank of Korea)

The Monetary Policy Committee of the Bank of Korea explained on the 11th, regarding the decision to keep the base interest rate at 3.5% per annum, that "given the increased risks in the financial sector and the high uncertainty in the policy environment, it is appropriate to monitor developments and assess the need for further rate hikes."

The Bank of Korea forecasted that South Korea's economic growth rate this year will slightly underperform the February projection of 1.6%.

In the monetary policy direction statement issued that day, the committee said, "Although the inflation rate is expected to continue its slowing trend, the upward momentum exceeding the target level will persist for a considerable period. Given the increased risks in the financial sector in major countries and the high uncertainty in the policy environment, we will monitor the pace of inflation slowdown, financial stability conditions, and other uncertain factors."

Regarding the domestic economic situation, consumption showed some recovery from the sluggishness in the fourth quarter of last year, but exports continued to decline sharply due to the deepening IT sector downturn, leading to a sustained slowdown in growth.

Looking ahead, the domestic economy is expected to continue sluggish growth until the first half of the year due to the global economic slowdown and the effects of previous interest rate hikes, but is anticipated to gradually recover in the second half with the easing of the IT sector downturn and the recovery of the Chinese economy.

The committee stated, "Although this year's economic growth rate is expected to slightly underperform the February forecast, the outlook remains highly uncertain."

The consumer price inflation rate is expected to continue its deceleration.

The committee said, "Going forward, the consumer price inflation rate is expected to slow down to the 3% range from the second quarter onward due to base effects from last year's sharp rise in international oil prices and weakening demand pressures. The annual inflation rate for this year is expected to align with the February forecast of 3.5%."

However, it added, "Considering the recent slow pace of core inflation decline, the core inflation rate is likely to somewhat exceed the previous forecast of 3.0% for this year. There is significant uncertainty in future inflation forecasts related to international oil prices and exchange rate movements, the degree of domestic and global economic slowdown, and the timing and extent of public utility rate hikes."

Lee Chang-yong, Governor of the Bank of Korea, is entering the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul on the 11th.
[Image source=Yonhap News]

The financial and foreign exchange markets were mainly influenced by movements in the international financial markets, resulting in increased volatility of key price variables.

The committee said, "Long-term market interest rates rose significantly along with major countries' government bond yields until early March, then sharply declined following the Silicon Valley Bank incident. The won-dollar exchange rate fluctuated considerably influenced by trade balance trends, concerns over financial instability in major countries, and weakened expectations of U.S. monetary tightening."

The committee emphasized that it will operate monetary policy to ensure that inflation stabilizes at the target level over the medium term while monitoring growth trends.

The committee stated, "It is necessary to maintain a tightening stance focused on price stability for a considerable period while assessing the need for additional rate hikes. In this process, we will closely monitor the pace of inflation slowdown, downside risks to growth and financial stability, the effects of previous rate hikes, and changes in monetary policies of major countries."

Lee Chang-yong, Governor of the Bank of Korea, is attending the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the 11th.
[Photo by Yonhap News]

The following is the full text of the Bank of Korea Monetary Policy Committee's monetary policy direction statement.

The Monetary Policy Committee decided to maintain the Bank of Korea's base interest rate at the current level (3.50%) until the next monetary policy decision. Although the inflation rate is expected to continue its slowing trend, the upward momentum exceeding the target level is projected to persist for a considerable period. Given the increased risks in the financial sector in major countries and the high uncertainty in the policy environment, it is deemed appropriate to monitor the pace of inflation slowdown, financial stability conditions, and other uncertain factors while assessing the need for further rate hikes.

The global economy showed a better-than-expected recovery trend, but the bankruptcy of Silicon Valley Bank in the U.S. increased financial sector risks in major countries, raising downside risks to the economy. Global inflation continues to slow but remains at a high level, with core inflation declining relatively slowly. In international financial markets, volatility of key price variables expanded significantly influenced by financial sector risks and changes in expectations regarding the U.S. Federal Reserve's monetary policy. The U.S. dollar strengthened until early March but weakened due to financial instability and reduced expectations of Fed tightening. Long-term government bond yields in major countries rose but sharply declined after mid-March. Going forward, the global economy and international financial markets are expected to be influenced by the pace of global inflation slowdown, financial sector risk conditions, changes in major countries' monetary policies and U.S. dollar movements, and the recovery of the Chinese economy.

The domestic economy showed some recovery in consumption from the sluggishness in the fourth quarter of last year, but exports continued to decline sharply due to the deepening IT sector downturn, resulting in a sustained slowdown in growth. Employment remained generally favorable, but the increase in the number of employed persons slowed due to the economic slowdown. The domestic economy is expected to continue sluggish growth until the first half of the year due to the global economic slowdown and the effects of previous interest rate hikes, but is anticipated to gradually recover in the second half with the easing of the IT sector downturn and the recovery of the Chinese economy. This year's growth rate is expected to slightly underperform the February forecast of 1.6%, but the outlook remains highly uncertain.

Consumer prices continued to slow in March, with the inflation rate falling from 4.8% in the previous month to 4.2%. This was mainly due to a wider decline in petroleum product prices and a slowdown in the rising trend of processed food prices that had been continuously increasing. The core inflation rate (excluding food and energy) in March was 4.0%, unchanged from the previous month, and short-term inflation expectations fell slightly to 3.9%. Going forward, the consumer price inflation rate is expected to continue slowing to the 3% range from the second quarter onward due to base effects from last year's sharp rise in international oil prices and weakening demand pressures. The annual inflation rate for this year is expected to align with the February forecast of 3.5%. However, considering the recent slow pace of core inflation decline, the core inflation rate is likely to somewhat exceed the previous forecast of 3.0% for this year. There is significant uncertainty in future inflation forecasts related to international oil prices and exchange rate movements, the degree of domestic and global economic slowdown, and the timing and extent of public utility rate hikes.

The financial and foreign exchange markets were mainly influenced by movements in the international financial markets, resulting in increased volatility of key price variables. Long-term market interest rates rose significantly along with major countries' government bond yields until early March, then sharply declined following the Silicon Valley Bank incident. The won-dollar exchange rate fluctuated considerably influenced by trade balance trends, concerns over financial instability in major countries, and weakened expectations of U.S. Federal Reserve tightening. Household loans decreased and housing prices declined, but the magnitude of these changes narrowed.

The Monetary Policy Committee will continue to monitor growth trends while operating monetary policy to stabilize inflation at the target level over the medium term, paying close attention to financial stability. Although domestic economic growth is slowing and inflation is expected to continue decelerating, the upward momentum exceeding the target level is projected to persist for a considerable period, and policy uncertainty remains high. Therefore, it is necessary to maintain a tightening stance focused on price stability for a considerable period while assessing the need for additional rate hikes. In this process, the committee will closely monitor the pace of inflation slowdown, downside risks to growth and financial stability, the effects of previous rate hikes, and changes in monetary policies of major countries.