On the 17th, the Monetary Policy Committee of the Bank of Korea froze the base rate at 2.75% per year. In the preceding committee meeting in February, it lowered the rate by 0.25 percentage points (p), making this a pause. The base rate peaked at 3.50% in January 2023, the highest in 15 years, and has been on a gradual decline. The committee lowered the base rate by 0.25% p in meetings held in October and November of last year, as well as in February this year. The committee's decision to maintain the rate is interpreted as a response to fluctuations in the won-dollar exchange rate due to the tariff war originating from the U.S.
In light of domestic and external conditions, the Bank of Korea's judgment is to pause the base rate cuts. The Monetary Policy Committee members noted, "While prices continue to show stable trends, the deterioration of global trade conditions has expanded the downside risks to growth." They added, "However, the uncertainty regarding the government's stimulus policies and changes in U.S. tariff policy is significant," and mentioned the need to closely monitor the high volatility of the exchange rate and household loan trends.
The Bank of Korea projected that while domestic demand will see some easing, exports will face significant obstacles due to the tariff war originating from the U.S., leading to an economic slowdown. Two months ago, the Bank had projected an economic growth rate of 1.5% for this year, but on this day, it stated, "This year's growth rate will fall below the forecast made in February." Furthermore, it emphasized, "We will maintain the trend of rate cuts to alleviate downside risks to growth," and indicated that it will closely examine the flow of prices, household debt, and exchange rates to determine the timing and pace of any additional rate cuts.
The following is the full text of the decision regarding the monetary policy direction by the Monetary Policy Committee.
The Monetary Policy Committee has decided to maintain the Bank of Korea's base rate at the current level of 2.75% until the next determination of monetary policy direction. Amid prices continuing to show stability, the economic downturn in the first quarter and deterioration of global trade conditions have expanded the downside risks to growth. However, given the significant uncertainty surrounding the outlook due to changes in U.S. tariff policy and the government's stimulus measures, as well as the high volatility of the exchange rate and household loan trends, it was deemed appropriate to monitor changes in domestic and external conditions while maintaining the current base rate.
The global economy is facing increased downside risks to growth and heightened uncertainty regarding price trajectories due to deepening global trade conflicts. In international financial markets, the uncertainty of U.S. tariff policies continues, causing an increase in volatility of key price variables. As concerns over global economic slowdown have risen, major stock indices experienced significant declines followed by partial recoveries due to reciprocal tariff exemptions. Long-term government bond rates in the U.S. also dropped significantly before surging, and the U.S. dollar displayed substantial weakness. Going 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 major countries' monetary policies, and developments in geopolitical risks.
In terms of domestic economic conditions, the continuous political uncertainty and the deterioration of trade conditions have led to a slowdown in both domestic and export activities, resulting in weaker-than-expected growth trends. Employment has seen an increase in the overall number of individuals employed, but key sectors such as manufacturing continue to see a decline. In the future, while the weak domestic demand may see some easing, exports are expected to continue their declining trend due to ongoing uncertainties in trade conditions. Consequently, this year's growth rate is anticipated to fall below the forecast made in February (1.5%), but the uncertainty regarding the trajectory of growth related to the developments in trade negotiations and the timing and scale of supplementary budgets is assessed to be very high.
Domestic prices showed a stable trend in March, with consumer and core inflation rates (excluding food and energy) recorded at 2.1% and 1.9%, respectively. The short-term expected inflation rate remained at the same level as the previous month (2.7%). In the future, the inflation rate is expected to remain stable around 2%, influenced by rising exchange rates as an upward factor, but the drop in oil prices and low demand pressure will likely help sustain this stability. Furthermore, this year's consumer and core inflation rates are generally expected to align with the previous forecasts (1.9%, 1.8%). Future inflation trends will likely be influenced by domestic and international economic conditions, exchange rates, and movements in international oil prices, as well as the government's price stabilization measures.
In the financial and foreign exchange markets, the volatility of key price variables has significantly increased. The won-dollar exchange rate rose sharply in a short period due to the U.S. tariff policies, China's responses, and the inflow and outflow of investment funds, before retreating. Stock prices fell significantly due to concerns over economic and corporate performance downturns but later showed some recovery, while long-term government bond rates fell substantially. In the housing market, price increases and transaction volumes in the Seoul area expanded significantly before slowing down after the reassignment of land transaction permit zones. Household loans continue to show low growth, but the increase is expected to temporarily expand due to the recent increase in housing transactions.
The Monetary Policy Committee will operate monetary policy while monitoring growth trends, with the aim of ensuring that inflation rates stabilize at target levels in the medium term, while also paying attention to financial stability. Although the domestic economy is experiencing stable inflation rates, the increase in downside risks to growth and significantly expanded uncertainties regarding the projection trajectories due to worsening global trade conditions is concerning. From the perspective of financial stability, attention must be given to the impact of high exchange rate volatility on financial stability, as well as the potential for a resurgence in household debt due to the current easing stance. Therefore, future monetary policy will continue the trend of rate cuts aimed at alleviating downside risks to growth while closely examining changes in domestic and external policy conditions and the resulting trends in inflation, household debt, and exchange rates to determine the timing and pace of any additional base rate cuts.