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. While inflationary pressure has increased due to the Middle East war, growth has expanded more than expected on the back of strong exports, and risks persist from a financial stability perspective. However, given the still-high uncertainty surrounding the development of the Middle East situation and its spillover effects, it judged it appropriate to maintain the current base rate level and further examine the course of events and their impact on growth and prices.
□ The global economy is expected to see slower growth due to the impact of higher energy and raw material prices and supply disruptions stemming from the Middle East war, even as AI-related investment expands, while inflationary pressure is likely to increase considerably. In international financial markets, Government Bonds yields rose sharply and the U.S. dollar strengthened, influenced by delays in talks between the United States and Iran and the possibility of shifts in major countries' currency policy stances. Stock prices surged, reflecting expectations of increased AI investment demand and solid corporate earnings. Going forward, the global economy and international financial markets are expected to be affected by the evolution of the Middle East situation and AI investment trends, as well as changes in major countries' currency and fiscal policy and the trade environment.
□ The domestic economy has seen a significant expansion in growth as strong exports centered on semiconductors, increased investment, and a solid consumption trend continued. Employment continued to grow in terms of the number of employed persons, but the increase narrowed mainly in the service sector. Going forward, although the impact of higher raw material prices and supply-demand disruptions is likely to expand somewhat, the economy is expected to continue improving on the back of a favorable semiconductor cycle and an extra budget. Accordingly, this year's growth rate is expected to be 2.6%, well above the 2% forecast in Feb. High upside and downside risks are embedded in this growth path regarding the extent of the semiconductor upcycle and its spillover to domestic demand, the development of the Middle East situation, and changes in the trade environment.
□ As for domestic prices, the consumer price inflation rate in Apr. rose considerably to 2.6% as petroleum product prices jumped, while the core inflation rate (index excluding food and energy) remained at 2.2%. Short-term expected inflation (general public) was in the upper 2% range. Price increases are expected to widen further as the spillover effects of rising international oil prices expand and demand-side pressure from income gains gradually increases. Accordingly, this year's consumer price and core inflation rates are expected to be 2.7% and 2.4%, respectively, well above the Feb. forecasts of 2.2% and 2.1%. It is judged that uncertainty remains high for the future inflation path regarding movements in international oil prices and the exchange rate, the extent of expense-push pass-through, and the effectiveness of the government's price stabilization measures.
□ In the financial and foreign exchange markets, high volatility in key price variables continued. Treasury bond yields rose sharply on increased domestic and overseas inflation concerns and shifting expectations for currency policy, and the won-dollar exchange rate, which had fallen somewhat, climbed back to around 1,500 won due to a stronger U.S. dollar and continued net selling of stocks by foreigners. While stock prices fluctuated widely under the influence of developments in the Middle East, they continued a steep upward trend on expectations of improved corporate earnings. In the Seoul metropolitan area, housing prices saw a renewed expansion in gains and expectations for further increases also strengthened, while household loans continued to grow modestly, with the increase in housing-related loans widening somewhat.
□ the Bank of Korea's monetary policy committee will operate currency policy with attention to financial stability while checking the growth trend and ensuring that the inflation rate stabilizes at the target level over the medium term. In the domestic economy, the inflation rate is expected to remain above the target for a considerable period, and growth is likely to maintain a steady improvement thanks to a favorable semiconductor cycle despite the impact of the Middle East war. From a financial stability perspective, continued attention is needed to high exchange rate volatility and to the Seoul metropolitan dwellings market and household debt. Accordingly, future currency policy will determine the timing of base rate hikes by assessing the extent of rising inflationary pressure, the pace of economic improvement, and financial stability conditions.
□ On the base rate decision this time, five members of the committee voted in favor, while Commissioner Jang Yong-seong and Commissioner Yu Sang-dae expressed the view that it would be desirable to raise the base rate to 2.75%.