FOMC: "Likelihood of Delayed Convergence to Inflation Target Increases... Tightening to Continue for Extended Period"

Resolution on Monetary Policy Direction
Base Interest Rate Held Steady at 3.5% per Annum

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 19th. (Photo by Bank of Korea)

The Monetary Policy Committee of the Bank of Korea announced on the 19th that it has kept the base interest rate steady at 3.5% per annum, stating that "it will focus on price stability and maintain a tightening stance for a considerable period while assessing the need for further rate hikes."

Additionally, the committee noted that "the timing for the inflation rate to converge to the Bank of Korea's target level is likely to be delayed more than initially expected."

In the monetary policy direction statement released that day, the committee explained, "The pace of inflation slowdown is expected to be more gradual than initially anticipated, and given the need to monitor the increasing trend in household debt, it is deemed appropriate to maintain the current tightening stance."

The committee evaluated the domestic economy as showing a somewhat slow recovery in consumption, but with a moderate improvement in growth momentum as export sluggishness eased. Employment was generally favorable, with low unemployment rates and steady increases in the number of employed persons.

The committee stated, "Going forward, the domestic economy is expected to gradually improve in growth due to the easing of export sluggishness, and this year's growth rate is anticipated to generally align with the August forecast of 1.4%. However, uncertainties in the growth trajectory have increased due to heightened geopolitical risks and prolonged monetary tightening in major countries."

Consumer price inflation is expected to decrease to the low 3% range by the end of this year and continue a moderate slowdown next year. However, due to the heightened upside risks from increased international oil prices, exchange rate impacts, and the Israel-Hamas conflict, the timing for consumer price inflation to converge to the target level is likely to be delayed more than initially expected.

The committee explained, "Core inflation is also expected to continue a gradual slowing trend due to weakening demand pressures, but the pace of slowdown is likely to be more gradual than initially anticipated due to the ongoing ripple effects of accumulated cost-push pressures."

Regarding the financial and foreign exchange markets, the committee assessed that amid increased volatility caused by the U.S. Federal Reserve's indication of prolonged high policy rates and heightened geopolitical risks, long-term government bond yields and the won-dollar exchange rate rose significantly, while stock prices declined.

It added, "Risks in some non-bank sectors appear to be easing, housing prices continued to rise mainly in the Seoul metropolitan area, and household loans, centered on housing-related loans, continued to increase."

The committee stated it will decide on additional base rate hikes while maintaining the tightening stance. It said, "In this process, we will closely monitor the inflation slowdown trend, risks to financial stability, downside risks to growth, trends in household debt increases, changes in major countries' monetary policies, and developments in geopolitical risks."

Below is the full text of the 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 direction decision, operating monetary policy accordingly. Although the inflation rate is expected to continue its underlying slowing trend, given the prolonged monetary tightening in major countries, increased geopolitical risks, and significantly heightened uncertainties in inflation and growth outlooks, the pace of inflation slowdown is projected to be more gradual than initially expected. Additionally, the increasing trend in household debt needs to be monitored, so maintaining the current tightening stance is considered appropriate. The necessity for further rate hikes will be assessed while reviewing changes in domestic and external policy conditions.

The global economy faces increased uncertainties related to economic and inflation trends due to prolonged monetary tightening in major countries and the Israel-Hamas conflict. Global growth is expected to continue slowing, and while inflation in major countries is gradually easing, it remains at a high level, with upside risks increased by rising international oil prices. In international financial markets, government bond yields have risen sharply, and the U.S. dollar has strengthened significantly, leading to increased volatility in key price variables. Going forward, the global economy and international financial markets are expected to be influenced by movements in international oil prices, the slowing trend of global inflation, changes and ripple effects of major countries' monetary policies, and developments in the Israel-Hamas conflict.

The domestic economy shows a somewhat slow recovery in consumption but continues a moderate improvement in growth as export sluggishness eases. Employment remains generally favorable with low unemployment rates and steady increases in the number of employed persons. Going forward, the domestic economy is expected to gradually improve in growth due to the easing of export sluggishness, and this year's growth rate is anticipated to generally align with the August forecast of 1.4%. However, uncertainties in the growth trajectory have increased due to heightened geopolitical risks and prolonged monetary tightening in major countries.

Consumer prices rose by 3.7% in September, higher than the previous month, due to increases in energy and agricultural product prices. However, core inflation (excluding food and energy) and short-term inflation expectations both remained at 3.3% in September, the same level as the previous month. Consumer price inflation is expected to decrease to the low 3% range by the end of this year and continue a moderate slowdown next year. However, due to the heightened upside risks from increased international oil prices, exchange rate impacts, and the Israel-Hamas conflict, the timing for consumer price inflation to converge to the target level is likely to be delayed more than initially expected. Core inflation is also expected to continue a gradual slowing trend due to weakening demand pressures, but the pace of slowdown is likely to be more gradual than initially anticipated due to the ongoing ripple effects of accumulated cost-push pressures.

The financial and foreign exchange markets experienced increased volatility amid the U.S. Federal Reserve's indication of prolonged high policy rates and heightened geopolitical risks, with long-term government bond yields and the won/dollar exchange rate rising significantly and stock prices declining. Risks in some non-bank sectors appear to be easing. Housing prices continued to rise mainly in the Seoul metropolitan area, and household loans, centered on housing-related loans, continued to increase.

The Monetary Policy Committee will continue to monitor growth while operating monetary policy to ensure that inflation stabilizes at the target level over the medium term, paying attention to financial stability. The domestic economy is gradually improving in growth, but uncertainties in policy conditions have increased. Therefore, the committee will focus on price stability and maintain a tightening stance for a considerable period while assessing the need for further rate hikes. In this process, it will closely monitor the inflation slowdown trend, risks to financial stability, downside risks to growth, trends in household debt increases, changes in major countries' monetary policies, and developments in geopolitical risks.