Monetary Policy Decision
The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 3.00% to 2.75%. Although concerns about foreign exchange markets still remain, inflation stabilization has continued along with an ongoing slowdown in household debt, while the growth rate is forecast to decline significantly. The Board, therefore, judged that it is appropriate to further cut the Base Rate and mitigate downward pressure on the economy.
The currently available information suggests that the global economy faces increased downside risks to growth and heightened uncertainties along the inflation path, affected by U.S. tariff policies. In global financial markets, concerns over the new U.S. administration's economic policies, which have significantly escalated, have somewhat eased, and the possibility of an end to the Russia-Ukraine war has emerged, leading to a partial reversal of the strength of the U.S. dollar and to a decline in long-term government bond yields in major countries. Looking ahead, the global economy and financial markets will both be influenced by U.S. tariff policies, by changes in monetary policies in major economies, as well as by geopolitical risks.
In terms of the domestic economy, export growth has weakened amid a slump in consumption, driven by increased political uncertainties following the declaration of martial law and by a deterioration in weather conditions. The labor market has continued its slowdown as the number of employed persons in major industries has persisted in declining. Going forward, trends in the domestic demand recovery and in export growth are forecast to be lower than previously expected due to deteriorating economic sentiment and due to U.S. tariff policies. Consequently, the growth rate is forecast at 1.5% for this year, significantly lower than the November projections of 1.9%. High uncertainties remain along the future path of economic growth concerning trade policies in major countries and concerning the monetary policy at the U.S. Federal Reserve, as well as economic stimulus measures by the Korean government and changes in the domestic political situation.
Consumer price inflation rose to 2.2% in January reflecting an increase in global oil prices and exchange rates. However, core inflation (excluding changes in food and energy prices from the CPI) has maintained its stabilization trend at 1.9%. Short-term inflation expectations have fallen slightly to 2.7% in February. Despite upward pressure from the exchange rate, inflation is expected to remain stable at around 2%, affected by subdued demand pressure. As a result, consumer price inflation is forecast to be consistent with the November forecast of 1.9% for this year, and core inflation is expected to be 1.8% for this year, slightly below the prior forecast of 1.9%. The future path of inflation is likely to be affected by movements in exchange rates and global oil prices, by economic conditions at home and abroad, and by the government's price stabilization measures.
In financial and foreign exchange markets, the Korean won to U.S. dollar exchange rate did remain highly volatile, mainly affected by increased domestic political uncertainties, by U.S. tariff policies, and by the U.S. Federal Reserve’s monetary policy, before declining. Long-term Korean Treasury bond yields, mainly affected by the expectations of policy rate cuts at home and abroad, have rebounded after having declined. Housing prices have declined in most regions across the country, excluding Seoul. Growth in household loans has also sustained its slowing trend.
The Board will continue to conduct monetary policy in order to stabilize consumer price inflation at the target level over the medium-term horizon as it monitors economic growth, while paying attention to financial stability. Regarding the domestic economy, it is judged that inflation stabilization has continued, while domestic economic growth is projected to remain low for some time. Regarding financial stability, the slowing trend in household debt is anticipated to persist. However, it is necessary to remain cautious about the possibility of a rebound in household debt following a decline in interest rates, as well as the high exchange rate volatility. Therefore, while closely monitoring changes in domestic and external economic policies and in the domestic political situation, as well as the effects of the Base Rate cuts so far on inflation, economic growth, and financial stability, the Board will determine the timing and pace of any further Base Rate cuts.
Opening Remarks to the Press Conference (February 25, 2025)
Today, the Monetary Policy Board (MPB) of the Bank of Korea decided to lower the Base Rate by 25 basis points, from 3.00% to 2.75%. I will first go over economic conditions at home and abroad, and then explain the background to today’s Base Rate decision.
Please refer to the attached.