BOK rate policy-full text

Full text of BOK statement on monetary policy decision in May

SEOUL, May 28 (Yonhap) -- The following is the full text of a statement by the Bank of Korea (BOK) on its monetary policy decision Thursday, where the central bank held the key rate steady at 2.5 percent at its rate-setting meeting in Seoul.

The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 2.50% for the intermeeting period. Inflationary pressure has increased due to the Middle East war, growth has increased more than previously expected, supported by strong exports, and financial stability risks have still remained. However, given the uncertainties surrounding developments in the Middle East and that their spillover effects remain high, the Board judged that it would be appropriate to maintain the current level of the Base Rate while assessing developments in the conflict and their impacts on growth and inflation.

The currently available information suggests that, despite the expansion of AI-related investment, global economic growth is expected to slow and inflationary pressure to increase considerably, due to energy and commodity price hikes and to supply constraints stemming from the Middle East war. In global financial markets, government bond yields rose substantially and the US dollar appreciated, influenced by protracted negotiations between the US and Iran and the possibility of shifts in monetary policy stances in major countries. Stock prices rose sharply, reflecting prospects for growing demand for AI investment and favorable corporate earnings. Looking ahead, the global economy and financial markets will be affected by developments in the Middle East conflict, by the AI investment trend, and by changes in monetary and fiscal policies in major economies and in the trade environment.

The domestic economy has grown significantly, as strong exports and increased investment, led by semiconductors and favorable consumption trends have continued. Employment continued its upward trend in the number of persons employed, even though the pace of increase has moderated, particularly in the service sector. Going forward, the domestic economy is expected to continue its improvement trend, supported by a strong semiconductor sector and the supplementary budget, although the effects of rising commodity prices and supply constraints may increase somewhat. Consequently, the growth rate is forecast at 2.6% for this year, significantly higher than the February projection of 2.0%. There remain both high upside and downside risks along the future path of economic growth related to the degree of expansion in the semiconductor sector and its spillover effects onto domestic demand, developments in the Middle East, and changes in the trade environment.

Consumer price inflation rose considerably to 2.6% in April, driven by a sharp increase in petroleum product prices, while core inflation (excluding food and energy) remained at 2.2%. Short-term inflation expectations among the general public have remained in the upper 2% range. Looking ahead, inflation is expected to increase further, as the spillover effects of higher global oil prices expand and as demand-side pressure stemming from income growth also gradually strengthens. Consequently, consumer prices and core inflation for this year are forecast at 2.7% and 2.4%, respectively, substantially higher than the February projections of 2.2% and 2.1%. The future path of inflation is judged to be subject to high uncertainties related to movements in global oil prices and the exchange rate, to the extent of cost-pressure transmission, and to the effects of the government's price stabilization measures.

In financial and foreign exchange markets, high volatility in major price variables continued. Korean Treasury bond yields rose sharply due to concerns about inflation at home and abroad and changes in expectations for monetary policy. The Korean won to US dollar exchange rate, which had declined somewhat, rose back to around 1,500 won, owing to the appreciation of the US dollar and to the net selling of domestic stocks by foreign investors. Stock prices continued their steep upward trend on expectations of improved corporate earnings, while still fluctuating considerably in response to developments in the Middle East. Housing prices in Seoul and its surrounding areas accelerated again and expectations of further increases have also heightened. Household loans continued to grow at a limited pace, although the increase in housing-related loans expanded somewhat more.

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. While inflation is forecast to remain above the target level for a considerable time, economic growth is expected to continue its solid improvement trend, supported by a strong semiconductor sector, despite the impact of developments in the Middle East. Regarding financial stability, it is necessary to continue to pay attention to high exchange rate volatility and to conditions regarding the housing market in Seoul and its surrounding areas and household debt. Therefore, the Board will decide the timing of any rate hikes while assessing the extent of the increase in inflationary pressure, the improvement trend in the domestic economy, and financial stability.

Five Monetary Policy Board members supported the decision to keep the Base Rate unchanged, while two members, Chang Yongsung, and Ryoo Sangdai, voted against the decision, proposing to raise it to 2.75%.

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