On the 29th, the Bank of Korea's Monetary Policy Committee decided to lower the benchmark interest rate by 0.25 percentage points (p) to an annual 2.50%. In the previous Monetary Policy Committee meeting in April, they held the rate steady due to fluctuations in the won-dollar exchange rate, which remain unresolved, but as signs of economic slowdown appeared, they shifted towards a rate cut. The benchmark interest rate has been on a gradual decline after peaking at 3.50% in January 2023, the highest in 15 years.
While the domestic and external situations are not stable, the Bank of Korea has determined that it cannot postpone economic stimulus measures. The Monetary Policy Committee noted, 'There is ongoing concern about the increase in household loans and the volatility of the foreign exchange market,' but added, 'Given that growth rates are expected to decline significantly, it is appropriate to lower the benchmark interest rate further to alleviate downward pressure on the economy.'
On the same day, the Bank of Korea lowered its economic growth forecast for this year from 1.5% to 0.8%. Following the Korea Development Institute (KDI) and foreign investment banks (IBs), the Bank of Korea has also officially anticipated a growth rate in the 0% range. The Monetary Policy Committee stated, 'The domestic economy is experiencing sluggish conditions in April following the first quarter's contraction due to delayed recovery in domestic demand and weakened exports,' and predicted that 'export growth will further slow due to the effects of U.S. tariffs.' They also revised the growth forecast for next year down from 1.8% to 1.7%.
Below is the full text of the monetary policy direction resolution of the Bank of Korea's Monetary Policy Committee.
The Monetary Policy Committee has decided to adjust the Bank of Korea's benchmark interest rate downward from the current 2.75% level to 2.50% until the next monetary policy direction decision. While there are ongoing concerns about the increase in household loans and the volatility of the foreign exchange market, it judged that, given the significant decline expected in growth rates amidst continued price stability, it is appropriate to lower the benchmark interest rate further to alleviate downward pressure on the economy.
The global economy is expected to slow due to the effects of high tariff rates, even as global trade conflicts have eased somewhat, and the uncertainty regarding price trajectories is high. In the international financial markets, a previously heightened risk aversion has eased, leading to a rebound in stock prices; however, the continued uncertainty in U.S. policies and concerns over fiscal deficits have resulted in rising long-term U.S. government bond yields, with the dollar index experiencing a slight increase before falling back. It seems that upcoming negotiations on tariffs between the U.S. and major countries, along with changes in major countries' monetary policies and developments in geopolitical risks, will significantly influence the global economy and international financial markets.
The domestic economy continued to experience sluggishness in April, following a contraction in the first quarter, due to delays in recovery in domestic consumption and construction investment, as well as weakened exports. Employment figures indicate a steady increase in the overall number of employed individuals; however, major sectors such as manufacturing continue to decline. Domestic demand is expected to gradually improve, but the pace seems slow, while exports are anticipated to further slow due to the impact of U.S. tariffs. Accordingly, this year's growth rate is projected to be 0.8%, significantly below the February forecast of 1.5%. The uncertainty surrounding future growth paths is assessed to be very high, related to the developments in trade negotiations, government stimulus measures, and major countries' monetary policy directions.
Domestic prices have maintained a stable trend in April, with the consumer price index and core inflation rate (excluding food and energy) each rising by 2.1%. The short-term expected inflation rate fell to 2.6% in May from 2.8% the previous month. Going forward, the inflation rate is expected to remain stable around 2% as upward pressures from increases in processed food and service prices are offset by declining international oil prices and lower demand pressures. Thus, this year's consumer price inflation rate is expected to be 1.9%, in line with the February forecast, and the core inflation rate is projected to slightly exceed the previous forecast of 1.8%, also at 1.9%. Future price trajectories are expected to be influenced by both domestic and international economic conditions, exchange rate movements, international oil fluctuations, and government measures for price stability.
In the financial and foreign exchange markets, major price variables were primarily influenced by external factors such as tariff negotiations between the U.S. and other countries, leading to fluctuations. The won-dollar exchange rate continued to show high volatility but fell due to easing trade tensions and the strengthening of Asian currencies, while long-term government bond yields rebounded due to rising U.S. long-term rates, although the increase was limited compared to major countries. Stock prices rose due to easing concerns over corporate performance. Housing prices continued to increase in the Seoul area, while declines persisted in other regions, and the increase in household loans was amplified due to increased housing transactions in February and March.
The Monetary Policy Committee will continue to monitor growth trends while ensuring that the inflation rate stabilizes at the target level over the medium term and will implement monetary policy while paying attention to financial stability. The domestic economy is expected to see a significant decline in growth this year while maintaining stable inflation rates, and there is also high uncertainty regarding future growth paths. From the perspective of financial stability, it is necessary to be cautious of the increased potential for household debt growth due to the ongoing monetary easing stance and the high volatility of the foreign exchange market. Therefore, future monetary policy will continue the trend of rate cuts to alleviate downward risks to growth while closely monitoring changes in domestic and foreign policy conditions, along with the resulting price trends and financial stability situations to determine the timing and pace of any further interest rate cuts.