Decision Document of the November Monetary Policy Direction Meeting
The Monetary Policy Committee of the Bank of Korea announced on the 28th that after two consecutive surprise cuts of the base interest rate from 3.25% to 3.00%, "Although exchange rate volatility has increased, inflation has stabilized and the household debt slowdown trend continues, downside risks to growth have intensified," and stated that "it was deemed appropriate to further lower the base interest rate to mitigate downside risks to the economy."
Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the 28th. Photo by Joint Press Corps
In the resolution of the monetary policy direction meeting held that morning, the Bank of Korea's Monetary Policy Committee said, "The domestic economy is judged to have high uncertainty in the growth path while inflation stabilizes," and "From a financial stability perspective, the household debt slowdown trend is expected to continue for the time being, but attention should be paid to the possibility of high volatility in the exchange rate."
It added, "Future monetary policy will carefully examine the impact of interest rate cuts on inflation, growth, household debt, and exchange rates, as well as the conflicting relationships among policy variables, and will decide on the pace of further cuts accordingly."
Regarding the domestic economy, it said, "Growth momentum has weakened as export growth slowed amid a moderate recovery in domestic demand," and "Going forward, domestic consumption is expected to continue a moderate recovery, but export growth is likely to be lower than initially expected due to intensified competition in key industries and strengthened protectionism." It added, "However, there is high uncertainty related to changes in the trade environment, IT export trends, and the pace of domestic demand recovery."
On inflation, it stated, "In October, the consumer price inflation rate temporarily dropped significantly to 1.3% due to a decline in petroleum prices, and the core inflation rate (excluding food and energy) also slowed to 1.8%." It forecast that inflation will remain stable as the upward pressure from exchange rate increases will be offset by falling international oil prices and low demand pressure.
Regarding the exchange rate and household debt, it explained, "The won-dollar exchange rate rose significantly influenced by the strength of the US dollar," and "Household loans slightly increased due to seasonal factors, but the impact of macroprudential policies continues, and the slowdown trend is expected to persist mainly in housing-related loans for the time being."
Below is the full text of the Monetary Policy Direction meeting resolution.
The Monetary Policy Committee decided to operate monetary policy by lowering the Bank of Korea’s base interest rate from the current 3.25% level to 3.00% until the next monetary policy direction decision. Although exchange rate volatility has increased, inflation has stabilized and the household debt slowdown trend continues, while downside risks to growth have intensified. Accordingly, it was judged appropriate to further lower the base interest rate to mitigate downside risks to the economy.
The global economy faces increased uncertainty in growth and inflation due to the direction of economic policies of the new US administration. In international financial markets, major countries continued to lower policy rates, but long-term US Treasury yields rose sharply and the dollar strengthened significantly. Going forward, the global economy and international financial markets are expected to be influenced by the economic policy implementation of the new US administration, changes in major countries’ monetary policies, and geopolitical risks.
The domestic economy has weakened growth momentum as export growth slowed amid a moderate recovery in domestic demand. Employment shows a low unemployment rate, but the increase in the number of employed persons is gradually slowing. Going forward, domestic consumption is expected to continue a moderate recovery, but export growth is likely to be lower than initially expected due to intensified competition in key industries and strengthened protectionism. Accordingly, this year’s and next year’s growth rates are expected to be 2.2% and 1.9%, respectively, below the August forecasts of 2.4% and 2.1%. However, there is high uncertainty regarding the growth path related to changes in the trade environment, IT export trends, and the pace of domestic demand recovery.
Domestic inflation has remained stable. In October, consumer price inflation temporarily dropped significantly to 1.3% due to a decline in petroleum prices, and core inflation (excluding food and energy) also slowed to 1.8%. Short-term inflation expectations remained at the same level as the previous month (2.8%). Going forward, inflation is expected to remain stable as upward pressure from exchange rate increases will be offset by falling international oil prices and low demand pressure. Accordingly, this year’s and next year’s consumer price inflation rates are expected to be 2.3% and 1.9%, respectively, below previous forecasts of 2.5% and 2.1%. Core inflation is expected to be 2.2% this year, in line with previous forecasts, and slightly lower at 1.9% next year compared to the previous forecast of 2.0%. Future inflation paths are expected to be influenced by exchange rate and international oil price movements, domestic and foreign economic trends, and public utility fee adjustments.
In financial and foreign exchange markets, government bond yields fell, showing a differentiated movement from the sharp rise in US Treasury yields, and the won-dollar exchange rate rose significantly influenced by the strength of the US dollar. Stock prices declined due to deteriorating earnings outlooks of major companies. Housing prices showed a reduced increase in the Seoul metropolitan area and continued to decline in provincial areas. Household loans slightly increased due to seasonal factors, but the impact of macroprudential policies continues, and the slowdown trend is expected to persist mainly in housing-related loans for the time being.
The Monetary Policy Committee will continue to operate monetary policy with attention to financial stability while ensuring that inflation stabilizes at the target level over the medium term by monitoring growth momentum. The domestic economy is judged to have high uncertainty in the growth path while inflation stabilizes. From a financial stability perspective, the household debt slowdown trend is expected to continue for the time being, but attention should be paid to the possibility of high volatility in the exchange rate. Therefore, future monetary policy will carefully examine the impact of interest rate cuts on inflation, growth, household debt, and exchange rates, as well as the conflicting relationships among policy variables, and will decide on the pace of further cuts accordingly.
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