Direction of currency policy
□ 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 decision on the direction of currency policy. With both upside pressure on prices and downside pressure on growth increasing due to the Middle East war, and volatility in the financial and foreign exchange markets expanding sharply, and given the high uncertainty related to the Middle East situation going forward, it judged it appropriate to maintain the current base rate level while further examining the course of events and spillover effects.
□ The global economy has maintained relatively solid growth on the back of investment related to AI and fiscal expansion in major countries, but growth is expected to weaken and inflation to expand due to rising energy prices and supply disruptions caused by the Middle East war. In the international financial market, risk aversion has strengthened, significantly increasing the volatility of key price variables. While long-term Government Bonds yields rose sharply on concerns about expanding inflation and the resulting changes in expectations for currency policy, the U.S. dollar turned strong and stock prices fell sharply. However, after the temporary truce between the United States and Iran, some of these moves have partially reversed. The global economy and international financial markets are expected to be affected by the development of the Middle East situation, changes in major countries' currency and fiscal policy and trade environment, and AI investment flows.
□ The domestic economy continued to improve on the back of strong exports and a recovery in consumption, and employment also maintained an increase in the number of employed, but after the Middle East situation, downside pressure on growth has increased, with economic sentiment weakening and production disruptions occurring in some industries. Going forward, despite strong semiconductor exports and an extra budget, the domestic economy's growth is expected to slow more than initially expected due to rising energy prices and supply disruptions, with this year's growth rate expected to fall below the February forecast (2.0%). However, this growth path is likely to be significantly affected by the development of the Middle East situation, changes in the trade environment, the semiconductor cycle, and the pace of the domestic demand recovery.
□ As for domestic prices, the March consumer price inflation rate (2.2%) rose from the previous month as petroleum product prices increased sharply, but the core inflation rate (index excluding food and energy) (2.2%) edged down due to a slower rise in personal service prices. Short-term expected inflation (general public, 2.7%) rose slightly from the previous month. Going forward, upward pressure on the inflation rate will expand significantly due to higher international oil prices, but the government's price stabilization measures will partly mitigate this, pushing it up to the mid-to-high 2% range. Accordingly, this year's consumer price inflation rate is expected to considerably exceed the February forecast (2.2%), and the core inflation rate is also expected to be somewhat higher than the initial forecast (2.1%). Uncertainty related to the future inflation path is very high regarding movements in international oil prices and the exchange rate, the effectiveness of government price stabilization measures, and the extent of the pass-through of expense increases.
□ In the financial and foreign exchange markets, volatility in key price variables has expanded significantly. The won-dollar exchange rate rose into the 1,500-won range due to the strength of the U.S. dollar following the Middle East war and net selling of stocks by foreign investors, then fell after the temporary truce between the United States and Iran. Treasury bond yields rose sharply and then declined on domestic and overseas inflation concerns and the resulting changes in expectations for currency policy, and stock prices, which had been on a steep upward trend, also saw sharp swings, correcting and then partially rebounding. Household loans continued to grow at a low pace as the government maintained its stance of strengthening macroprudential policy, and the rise in dwelling prices in the Seoul metropolitan area slowed and price increase expectations weakened due to government measures, but it is necessary to watch further to determine whether a trend toward stability will continue.
□ The Bank of Korea's monetary policy committee will operate currency policy while checking the growth trend so that the inflation rate can stabilize at the target level over a medium-term horizon, with attention to financial stability. For the domestic economy, both the upside risk to prices and the downside risk to growth have increased due to the Middle East war, and forecast uncertainty is very high. From the perspective of financial stability, it is necessary to pay attention to the impact of increased exchange rate volatility, while continually examining whether the stabilization trends in dwelling prices in the Seoul metropolitan area and in household debt will continue. Accordingly, future currency policy will be decided by closely examining changes in internal and external conditions such as the Middle East war and the resulting trends in prices and growth, as well as the financial stability situation.
□ All seven members of the monetary policy committee supported the decision to keep the base rate unchanged this time.