Currency policy direction
□ the Bank of Korea's monetary policy committee decided to operate currency policy by keeping the Bank of Korea base rate at the current level of 2.50% until the next currency policy direction decision. With inflation expected to gradually stabilize, growth continuing to improve, and risks to financial stability persisting, it judged it appropriate to maintain the current base rate level while reviewing internal and external policy conditions.
□ despite the impact of U.S. tariff policy, the global economy is expected to maintain a modest growth trend on the back of expansionary fiscal policy in major countries and continued AI-related investment, while inflation paths will likely differ by country. In international financial markets, long-term Government Bonds yields rose due to weakened expectations for additional rate cuts by major countries and concerns over fiscal soundness, and the U.S. dollar, which had been weak, turned strong on better-than-expected economic indicators. Stock prices continued to rise on expectations of improved earnings by corporations. Going forward, the global economy and international financial markets will likely be affected by changes in major countries' currency and fiscal policy, the global trade environment, and geopolitical risks.
□ the domestic economy continued to improve as consumption recovered and exports increased despite weak construction investment. Employment continued to increase, mainly in the services sector. Going forward, the domestic economy is expected to continue its improvement, with exports maintaining solid growth on the back of a favorable semiconductor cycle and domestic demand also improving as consumption continues to recover and the slump in construction investment eases. This year's growth rate is expected to be broadly in line with the November projection (1.8%), but upside risks appear to have increased somewhat due to a stronger upturn in the semiconductor cycle and better-than-expected growth in major countries.
□ domestically, consumer price inflation edged down to 2.3% in December as the rise in petroleum product prices widened but the increase in prices of agricultural, livestock, and fishery products slowed, while core inflation (excluding food and energy) was unchanged from the previous month at 2.0%. Short-term inflation expectations (general public) held at 2.6%, the same as the previous month. Going forward, the inflation rate will gradually decline to around 2% amid stable international oil prices, but the higher exchange rate will likely act as an upside risk. This year's consumer price and core inflation rates are expected to be broadly in line with the November projections (2.1% and 2.0%, respectively), and the future inflation path will likely be affected by movements in the exchange rate and international oil prices, domestic and external economic conditions, and the government's price stabilization measures.
□ in the financial and foreign exchange markets, the won/dollar exchange rate fell sharply due to foreign exchange market stabilization measures, then rose again to the mid-to-high 1,400-won range on a stronger dollar and weaker yen, heightened geopolitical risks, and continued overseas investment by residents. Treasury bond yields rose significantly on weakened expectations of rate cuts, then fell somewhat, while stock prices surged on expectations of improved earnings in key sectors such as semiconductors. Household loans continued to slow due to smaller increases in dwellings-related loans and net repayments of other loans, but dwellings prices in the greater Seoul area continued to rise sharply.
□ the Bank of Korea's monetary policy committee will operate currency policy to ensure that, while monitoring the growth trend, the inflation rate stabilizes at the target level over the medium term, with attention to financial stability. The domestic economy is judged to be on an improving growth track, with upside risks to the path somewhat increased, and the inflation rate is expected to gradually decline, although the higher exchange rate remains a potential upside risk. From a financial stability perspective, risks related to dwellings prices in the greater Seoul area and household debt, as well as high exchange rate volatility, remain. Accordingly, future currency policy will support the recovery in growth, while decisions will be made after closely reviewing changes in internal and external policy conditions and their effects on inflation and the state of financial stability.