MPC: "Growth Rate to Drop Significantly, Uncertainty High... Lowering Rates to Counter Downward Pressure"

Decision Statement from the May Monetary Policy Meeting

On May 29, the Monetary Policy Committee of the Bank of Korea lowered the base interest rate from 2.75% to 2.50% per annum, stating, "Growth is expected to decline significantly, and there is considerable uncertainty regarding the future growth trajectory." The committee added, "We have determined that it is appropriate to further lower the base rate to alleviate downward pressure on the economy."

Lee Changyong, Governor of the Bank of Korea, is striking the gavel to declare the opening of the Monetary Policy Committee plenary meeting held at the Bank of Korea headquarters in Jung-gu, Seoul on the 29th. Photo by Joint Press Corps

In the statement from the monetary policy meeting held that morning, the committee said, "Going forward, although domestic demand is expected to gradually recover, the pace will likely be slow. Exports are expected to see a greater decline, largely due to the impact of U.S. tariffs." The committee further assessed, "There is currently a very high level of uncertainty regarding the future growth path, due to factors such as the progress of trade negotiations, government stimulus measures, and the monetary policy directions of major economies."

Regarding inflation, the committee projected, "Upward pressures such as increases in processed food and service prices will be offset by declining international oil prices and subdued demand pressure, so inflation will remain stable at around 2%."

The committee stated, "In the financial and foreign exchange markets, major price variables fluctuated mainly due to external factors such as tariff negotiations between the U.S. and major countries. Housing prices continued to rise in the Seoul area, while the scale of household loan growth expanded due to increased housing transactions in February and March."

The committee further noted, "While inflation remains stable, the domestic economy is expected to see a significant decline in growth this year, with high uncertainty surrounding the future growth trajectory. From a financial stability perspective, it is necessary to pay attention to the potential for further increases in household debt due to continued monetary easing, as well as high volatility in the foreign exchange market."

The following is the full text of the monetary policy decision statement.

The Monetary Policy Committee has decided to operate monetary policy by lowering the Bank of Korea base rate from the current level of 2.75% to 2.50% until the next monetary policy decision. Although concerns remain regarding the continued increase in household lending and heightened volatility in the foreign exchange market, the committee judged that, given the ongoing stability in inflation and the significant projected decline in growth, it is appropriate to further lower the base rate to alleviate downward pressure on the economy.

Globally, while trade conflicts have somewhat eased, the high tariff environment is expected to slow growth, and there remains considerable uncertainty regarding the inflation path. In international financial markets, risk aversion, which had previously increased significantly, has subsided, leading to a rebound in stock prices. However, continued policy uncertainty and fiscal deficit concerns in the U.S. have pushed up long-term U.S. Treasury yields, and the dollar index rose slightly before retreating. Moving forward, the global economy and international financial markets are expected to be influenced by tariff negotiations between the U.S. and major countries, changes in monetary policy in major economies, and developments in geopolitical risks.

In the domestic economy, delayed recovery in domestic demand, such as consumption and construction investment, as well as a slowdown in exports, led to negative growth in the first quarter and continued sluggishness in April. While total employment continues to increase, key sectors such as manufacturing have seen continued declines. Although domestic demand is expected to gradually recover, the pace will likely be slow, and exports are expected to see a greater decline, largely due to the impact of U.S. tariffs. As a result, this year's growth rate is projected at 0.8%, significantly below the February forecast of 1.5%. There remains a very high level of uncertainty regarding the future growth path, due to factors such as the progress of trade negotiations, government stimulus measures, and the monetary policy directions of major economies.

Domestically, inflation remained stable in April, with both the headline and core consumer price indices (excluding food and energy) rising by 2.1%. Short-term inflation expectations fell to 2.6% in May, down from 2.8% the previous month. Going forward, inflation is expected to remain stable at around 2%, as upward pressures such as increases in processed food and service prices are offset by declining international oil prices and subdued demand pressure. Accordingly, the consumer price inflation rate for this year is projected at 1.9%, in line with the February forecast, while core inflation is expected to slightly exceed the previous forecast of 1.8%, reaching 1.9%. The future inflation path is likely to be influenced by domestic and global economic trends, exchange rates and international oil prices, and government measures to stabilize prices.

In the financial and foreign exchange markets, major price variables fluctuated mainly due to external factors such as tariff negotiations between the U.S. and major countries. The won-dollar exchange rate remained highly volatile, declining due to easing trade tensions and strengthening Asian currencies. Long-term government bond yields rebounded due to rising U.S. long-term rates, but the increase was limited compared to other major economies. Stock prices rose as concerns over corporate earnings eased. Housing prices continued to rise in the Seoul area, while they declined in other regions. The scale of household loan growth expanded due to increased housing transactions in February and March.

The Monetary Policy Committee will continue to monitor the growth trajectory and operate monetary policy to ensure that inflation stabilizes at the target level over the medium term, while also paying close attention to financial stability. While inflation remains stable, the domestic economy is expected to see a significant decline in growth this year, with high uncertainty surrounding the future growth trajectory. From a financial stability perspective, it is necessary to pay attention to the potential for further increases in household debt due to continued monetary easing, as well as high volatility in the foreign exchange market. Therefore, future monetary policy will maintain a rate-cutting stance to mitigate downside risks to growth, while carefully monitoring changes in domestic and external policy conditions, inflation trends, and financial stability. The timing and pace of any further base rate cuts will be determined accordingly.