On the 10th, the Monetary Policy Committee of the Bank of Korea announced that it would freeze the base rate at 2.50% per annum. This halts the monetary easing trend that was resumed when the rate was lowered by 0.25 percentage points in May. Following consecutive cuts in October and November last year, the Bank of Korea has alternated between holding (January, April) and cutting (February, May) rates, lowering the rate from 3.0% to 2.5% at the beginning of this year.
Members of the Monetary Policy Committee noted that amid growing volatility in the foreign exchange market due to uncertainties surrounding tariff negotiations, financial instability concerns have risen recently due to the rising trend in housing prices in the metropolitan area and the increasing household debt. Consequently, they mentioned that it is necessary to examine the impact of the trade negotiations and the recently strengthened household debt measures.
The Monetary Policy Committee stated, "The domestic economy is expected to maintain a low growth trend while showing stable inflation, amid significant uncertainties related to trade negotiations. Housing prices in the metropolitan area and the increase in household debt have greatly expanded, and considering the impact of the recently strengthened household debt measures, it is deemed appropriate to maintain the current level of the base rate."
Below is the full text of the Monetary Policy Committee's decision on the direction of monetary policy.
The Monetary Policy Committee decided to maintain the Bank of Korea's base rate at its current level of 2.50% until the next monetary policy direction decision. The domestic economy is expected to continue a low growth trend while inflation shows stable movement, with significant uncertainties surrounding trade negotiations. However, the rising trend in housing prices in the metropolitan area and the increase in household debt have greatly expanded, and it is deemed appropriate to maintain the current level of the base rate considering the need to examine the impact of the recently strengthened household debt measures.
Looking at the global economy, as uncertainties in the trade environment persist and the impact of high tariff rates has begun to materialize, growth is expected to gradually slow down while inflation paths are projected to differ by country. In the international financial market, as risk aversion weakened due to easing tensions in the Middle East and some progress in U.S.-China trade negotiations, stock prices in major countries surged significantly. The yield on U.S. long-term government bonds slightly fell on expectations of a resumption of interest rate cuts by the Federal Reserve, and the U.S. dollar continued its weak trend. In the future, the global economy and international financial markets are likely to be influenced by the results of tariff negotiations between the U.S. and major countries and changes in monetary policy in major countries.
The domestic economy has seen a continued decline in construction investment, but consumption has improved due to the resolution of uncertainties in domestic politics, and the increase in exports has alleviated growth stagnation somewhat. Employment has seen an increase in the total number of employed persons, but the decline continued in key sectors such as manufacturing. In the future, consumption is expected to gradually recover due to improvements in economic sentiment and supplementary budgets, while exports are anticipated to slow down due to U.S. tariffs. However, there remains significant uncertainty regarding the future growth trajectory in relation to the developments in trade negotiations with the U.S. and the pace of domestic recovery.
In June, the consumer price inflation rate rose to 2.2% due to the continued rise in processed food prices and base effects from agricultural and petroleum product prices. However, the core inflation rate (excluding food and energy) remained at 2.0%, the same as the previous month, and the short-term expected inflation rate decreased to 2.4%, down from 2.6% a month earlier. In the future, inflation rates are expected to continue to rise around 2% due to low demand pressure and stable international oil prices. Accordingly, consumer price and core inflation rates are generally expected to align with the projections made in May (1.9% each). Future inflation paths are expected to be influenced by domestic and international economic trends, exchange rates, movements in international oil prices, and government measures for price stability.
In the financial and foreign exchange markets, stock prices rose sharply due to improved investor sentiment expectations arising from capital market system reforms, and yields on long-term government bonds increased due to expectations of expanded government bonds issuance. The won-dollar exchange rate fluctuated significantly in the mid-1,300 won range, affected by the dynamics of trade negotiations and geopolitical risks, and is expected to continue experiencing high volatility. The housing market in the metropolitan area, such as Seoul, showed signs of overheating but has somewhat stabilized following the implementation of government household debt measures, while regional markets continued to struggle. Household loans have continued to grow significantly due to the increased housing transactions.
The Monetary Policy Committee will manage monetary policy while monitoring growth trends to ensure that the inflation rate stabilizes at the target level and paying attention to financial stability. The domestic economy is expected to continue a low growth trend while maintaining a stable inflation rate, with significant uncertainties regarding trade negotiations. In terms of financial stability, as risks in the metropolitan housing market and household debt have increased, it is necessary to monitor the effectiveness of macroprudential policies while being mindful of the potential for increased volatility in the foreign exchange market. Therefore, future monetary policy will continue to follow a easing trend to mitigate downside risks to growth, while closely examining changes in domestic and foreign policy conditions and the resulting inflation trends and financial stability situations to determine the timing and pace of additional rate cuts.