SEOUL, July 16 (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 raised the key rate by 25 basis points to 2.75 percent at its rate-setting meeting in Seoul.

The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 25 basis points from 2.50 percent to 2.75 percent. Along with economic growth having strengthened, led by exports and investment, inflation is expected to remain above the target level for a considerable time, and financial stability risks also persist. The Board, therefore, judged that it is appropriate to raise the Base Rate by 25 basis points.

The currently available information suggests that the global economy is expected to continue its moderate growth trend, driven by robust AI investment, despite continued uncertainty surrounding the situation in the Middle East, while inflation is projected to remain elevated for some time as the impact of the rise in energy prices feeds through with a time lag. In global financial markets, the U.S. dollar appreciated and government bond yields rose, influenced by changes in both expectations of rate hikes by the U.S. Federal Reserve and in developments in the Middle East. Stock prices fluctuated considerably in response to changes in the outlook for the AI and semiconductor sectors. Looking ahead, the global economy and financial markets will be affected by developments in the implementation of the U.S.-Iran ceasefire agreement, by the AI investment outlook, and by changes in the monetary and fiscal policies in major economies and in the trade environment.

The domestic economy strengthened further as exports and investment continued to grow strongly, led by the semiconductor sector, and as consumption showed a favorable trend. In terms of employment, the number of persons employed turned to an increase, led by the service sector, while employment continued to decline in major industries such as manufacturing. Going forward, the domestic economy is expected to continue its robust growth as exports and investment sustain their growth at a high level, supported by a strong semiconductor sector, and as the recovery in consumption accelerates on the back of improving income conditions. Accordingly, the growth rate for this year is expected to considerably exceed the May forecast of 2.6%. There remain uncertainties along the future path of economic growth related to the degree of the 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 to 3.2 percent in June, driven by the ongoing sharp rise in petroleum product prices and by a faster rise in the prices of agricultural, livestock, and fisheries products, while core inflation (excluding food and energy) remained unchanged from the previous month at 2.5 percent. Short-term inflation expectations among the general public remain in the upper 2 percent range. Looking ahead, inflation is expected to remain high for a considerable time, despite the decline in global oil prices, as the impacts of heightened costs and the elevated exchange rate persist and as demand-side pressures also gradually strengthen in line with improving income conditions. Accordingly, consumer price inflation for this year is expected to be generally consistent with the May forecast of 2.7 percent, while core inflation is likely to be somewhat higher than the previous forecast of 2.4 percent. 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 pace of the recovery in domestic demand, and to the extent of the broadening of the increase in wages.

In financial and foreign exchange markets, volatility in major price variables has increased significantly. The Korean won to U.S. dollar exchange rate rose to the mid-1,500 won range due to outflows of foreign stock investment funds and to U.S. dollar appreciation, but then declined to the upper 1,400 won range as foreign exchange market supply-demand conditions improved. Korean Treasury bond yields rose overall, affected by factors including changes in monetary policy expectations both at home and abroad. Stock prices underwent a sizable correction amid heightened volatility due to growing concerns over AI investment and large-scale net sales of domestic stocks by foreign investors. Household loans increased substantially, with increases in both housing-related loans and in other loans, while the pace of increases in housing prices in Seoul and its surrounding areas accelerated.

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 export and domestic demand are both expected to continue their robust improvement, supported by the spillover effects of a strong semiconductor sector, inflation is forecast to remain above the target level for a considerable time, as elevated cost pressures persist for some time and as demand-side pressure also gradually increases. Regarding financial stability, it is necessary to continue to pay attention to elevated exchange rate volatility and acceleration in both housing prices increases in Seoul and its surrounding areas and in household debt growth. Therefore, it is judged that it will be necessary to continue a policy stance consistent with further rate hikes, and the Board will determine the timing and pace of further increases in the Base Rate while assessing the extent of inflationary pressure, the improvement trend in the domestic economy, and financial stability.

All seven Monetary Policy Board members unanimously supported the decision to raise the Base Rate.

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