FOMC: "Inflation is slowing but remains high... Prolonged and sufficient tightening needed"

The Monetary Policy Committee of the Bank of Korea decided on the 11th to keep the base interest rate steady at 3.5% per annum for the eighth consecutive time, stating that "while the inflation rate continues its underlying slowing trend, it remains at a high level," and explained that "the monetary tightening stance will be maintained sufficiently and for a long period until there is confidence that the inflation rate will converge to the target level."

In the monetary policy direction statement issued that day, the Bank of Korea’s Monetary Policy Committee stated, "Domestic inflation is expected to continue its slowing trend, but the pace of deceleration is likely to be gradual due to the cumulative impact of cost pressures."

The committee explained, "The consumer price inflation rate is expected to fluctuate around 3% for the time being before gradually decreasing," and "the annual inflation rate is expected to generally align with the November forecast (2.6%)." The core inflation rate is also expected to continue a moderate slowing trend consistent with the November forecast path.

The domestic economy is projected to continue improving as exports maintain their growth momentum, although consumption and construction investment recovery will be slow. The committee stated, "This year’s growth rate is expected to generally align with the November forecast (2.1%)," and added, "Future growth paths will be influenced by the ripple effects of ongoing domestic and international monetary tightening and the extent of improvement in the IT sector."

The committee emphasized, "We will closely monitor the inflation slowing trend, risks related to financial stability and growth, trends in household debt increases, the conduct of monetary policy by major countries, and developments in geopolitical risks," and added, "While reviewing the growth trend, we will operate monetary policy with attention to financial stability to ensure that inflation stabilizes at the target level over the medium term."

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, continuing to operate monetary policy accordingly. Although the inflation rate continues its underlying slowing trend, it remains at a high level and uncertainty in the outlook is significant; therefore, it was deemed appropriate to maintain the current tightening stance while reviewing domestic and international policy conditions.

The global economy has continued to slow in growth and inflation due to the ongoing monetary tightening by major countries. However, inflation in major countries remains at a high level, and it is expected to take a considerable period before stabilizing at target levels. In international financial markets, expectations of a shift in the U.S. Federal Reserve’s monetary policy stance led to a decline in government bond yields and a slight weakening of the U.S. dollar. Going forward, the global economy and international financial markets are expected to be influenced by factors such as international oil prices and global inflation trends, the conduct and ripple effects of monetary policies by major countries, and developments in geopolitical risks.

The domestic economy has continued a moderate improvement trend centered on exports. Employment remains generally favorable, with the unemployment rate temporarily affected by transient factors but steady increases in the number of employed persons. Going forward, the domestic economy is expected to continue improving as exports maintain growth momentum, although consumption and construction investment recovery will be slow. This year’s growth rate is expected to generally align with the November forecast (2.1%). Future growth paths will be influenced by the ripple effects of ongoing domestic and international monetary tightening and the extent of improvement in the IT sector.

The consumer price inflation rate fell to 3.2% in December due to continued declines in petroleum product prices. Core inflation (excluding food and energy) and short-term inflation expectations also slowed to 2.8% and 3.2%, respectively. Domestic inflation is expected to continue its slowing trend, but the pace of deceleration is likely to be gradual due to the cumulative impact of cost pressures. The consumer price inflation rate is expected to fluctuate around 3% for the time being before gradually decreasing, and the annual inflation rate is expected to generally align with the November forecast (2.6%). The core inflation rate is also expected to continue a moderate slowing trend consistent with the November forecast path. There remains high uncertainty regarding future inflation paths related to international oil prices, agricultural product price movements, and domestic and international economic conditions.

In financial and foreign exchange markets, long-term government bond yields declined due to expectations of shifts in domestic and international monetary policy stances, while the won/dollar exchange rate fluctuated within a relatively narrow range. Household loans saw a significant reduction in growth as increases in housing-related loans continued but other loans decreased. Housing prices turned downward in both the Seoul metropolitan area and other regions, and risks related to real estate project financing (PF) have increased.

The Monetary Policy Committee will continue to monitor growth trends and operate monetary policy with attention to financial stability to ensure that inflation stabilizes at the target level over the medium term. As the domestic economy continues its improving growth trend but inflation remains at a high level with significant uncertainty in the outlook, the committee will maintain the monetary tightening stance sufficiently and for a long period until there is confidence that inflation will converge to the target level. In this process, the committee will closely monitor the inflation slowing trend, risks related to financial stability and growth, trends in household debt increases, the conduct of monetary policy by major countries, and developments in geopolitical risks.