BOK rate policy-full text

Full text of BOK statement on monetary policy decision in May

SEOUL, May 25 (Yonhap) -- The following is the full text of the Bank of Korea's statement on its latest monetary policy decision. The central bank's monetary policy board voted Thursday to hold the key interest rate steady for the third straight meeting at 3.5 percent.

The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 3.50 percent for the intermeeting period. It is forecast that inflation will remain above the target level for a considerable time although it is projected to continue to slow. The Board, therefore, sees that it is appropriate to maintain its current restrictive policy stance. Regarding the need to raise the Base Rate further, the Board will make a judgement while assessing the changes in domestic and external policy conditions.

The currently available information suggests that global economic growth has been more favorable than expected, but growth is projected to gradually slow due to the restrictive monetary policy stance being sustained in major countries and due to the contraction in bank credit supply. Global inflation still remains high, while continuing its slowdown, and core inflation is declining at a relatively slow pace.

In global financial markets, the U.S. dollar initially weakened as the U.S. Federal Reserve signaled a potential end to rate hikes, but then it has fluctuated since mid-May affected by economic indicators exceeding market expectations and by developments in U.S. debt ceiling negotiations. Long-term government bond yields in major countries have risen after having fluctuated within a narrow range. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected by the pace of global inflation slowdown, monetary policy changes in major countries, U.S. dollar trends, risks to small and medium-sized U.S. banks, debt ceiling negotiations in the U.S., and the recovery in the Chinese economy.

Domestic economic growth has continued to slow, with ongoing sluggishness of exports and investment, although private consumption has shown a modest recovery led by services. Labor market conditions have generally continued to be favorable, but the increase in the number of persons employed has declined due to the economic slowdown. Going forward, domestic economic growth is expected to remain weak for some time. From the second half of this year, however, it is expected to recover gradually with an easing of the sluggishness in the IT industry and the impact of the Chinese economic recovery. GDP growth for this year is projected to be 1.4 percent, lower than the February forecast of 1.6 percent, but uncertainties regarding the timing of a rebound in the IT industry, the domestic impact of the recovery in the Chinese economy, and economic growth in major advanced countries are all judged to be high.

Consumer price inflation has continued to moderate as expected, declining from 4.2 percent in March to 3.7 percent in April. This is mainly because the decline in the price of petroleum products has widened and the rise in the prices of processed food products has weakened. Core inflation (excluding changes in food and energy prices from the CPI) has stayed at 4.0 percent, and short-term inflation expectations among the general public have moved down to 3.5 percent in May.Looking ahead, it is forecast that consumer price inflation will fall considerably owing to the base effect from the sharp rises in global oil prices last year, and then will rise slightly and fluctuate at around the 3 percent level until the end of this year. Consumer price inflation for this year is expected to be consistent with the February forecast of 3.5 percent. Meanwhile, it is judged that the pace of core inflation slowdown is likely to be more modest than previously forecast due to accumulated cost pressure and favorable demand in services. Core inflation is projected to be 3.3 percent, which is higher than the February forecast of 3.0 percent. The inflation path is likely to be affected by movements of global oil prices and exchange rates, the degree of economic slowdown at home and abroad, and any further increase in public utility fees.

In financial and foreign exchange markets, the Korean won to U.S. dollar exchange rate has fluctuated considerably due to trends in the trade balance, expectations of an end to policy rate hikes by the U.S. Federal Reserve, and negotiations on the U.S. debt ceiling.

Long-term Korean Treasury bond yields have shown a modest increase, influenced by the movements of government bond yields in major countries. Household loans have slightly increased and the extent of the decline in housing prices has narrowed.

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. Domestic economic growth is expected to remain low, but inflation is projected to remain above the target level for a considerable time. Moreover, uncertainties surrounding the policy decision are judged to be high. The Board, therefore, will maintain a restrictive policy stance for a considerable time with an emphasis on ensuring price stability. Regarding the need to raise the Base Rate further, the Board will make a judgement while thoroughly assessing the pace of inflation slowdown, the economic downside risks and financial stability risks, the effects of the Base Rate raises, and monetary policy changes in major countries.

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