Direction of currency policy
□ the Bank of Korea's monetary policy committee decided to operate currency policy by raising the Bank of Korea base rate to 3.00% from the current 2.75% until the next decision on the direction of currency policy. The domestic economy is maintaining faster-than-expected growth on the back of strong exports and a recovery in domestic demand, while the inflation rate is expected to remain above the target level for a considerable period. In this situation, it is important to prevent the spread of price increases through a preemptive response and to continue to pay attention to financial stability risks, so it judged that a 0.25 percentage point increase in the base rate is appropriate.
□ The global economy is showing moderate growth, supported by solid AI investment despite continued tensions in the Middle East, and the inflation rate is expected to remain high for the time being due in part to rising energy prices. In international financial markets, as uncertainty persists over the U.S. Federal Reserve's currency policy and the situation in the Middle East, concerns about major countries' fiscal soundness have grown, pushing up long-term Government Bonds yields, while the U.S. dollar weakened. Stock prices generally rose, reflecting solid corporate earnings despite concerns about the profitability of global AI investment. Going forward, the global economy and international financial markets are expected to be affected by the development of the Middle East situation, the outlook for AI investment, changes in major countries' currency and fiscal policy and trade environments.
□ The domestic economy continued its strong growth, led by exports and investment. The number of employed persons kept increasing moderately, mainly in services. The domestic economy is expected to continue its solid growth as exports and investment keep rising strongly on the back of a favorable semiconductor cycle and as consumption gradually improves thanks to better income conditions. Accordingly, growth this year and next year is projected at 3.3% and 2.9%, well above the May forecasts of 2.6% and 2.1%, respectively. Uncertainties remain in the future growth path related to the expansion of the semiconductor cycle and its spillovers to domestic demand, the development of the Middle East situation, and changes in the trade environment.
□ On prices, in July the consumer price inflation rate fell to 2.8% as the rise in prices of petroleum products and agricultural, livestock, and fisheries products slowed, but core inflation (excluding food and energy) rose to 2.6% as the rise in prices of personal services and durable goods expanded. Short-term expected inflation among the general public remained in the upper 2% range. Going forward, prices are expected to rise above the target level for a considerable period as the pass-through of elevated expense pressures continues and demand-side pressures gradually increase due to improved income conditions. Accordingly, consumer price inflation this year and next year is projected at 2.7% and 2.3%, the same as the May forecasts, while core inflation is projected at 2.5% for both this year and next year, above the previous forecasts of 2.4% and 2.3%, respectively. It is judged that there are significant uncertainties in the future inflation path related to movements in international oil prices and the exchange rate, the pace of domestic demand improvement, and the extent of the spread of wage increases.
□ In financial and foreign exchange markets, high volatility in key price variables persisted. The won/dollar exchange rate fell sharply as foreign exchange supply-demand conditions improved due to a slowdown in foreign outflows from equities and as the U.S. dollar weakened. Government bond yields fluctuated considerably, affected by the expansion of domestic economic growth and movements in U.S. Treasury yields and international oil prices. Stock prices plunged, led by the semiconductor sector, and then partially rebounded. Dwelling prices in the Seoul metropolitan area continued to rise sharply, and household loans also increased considerably.
□ the Bank of Korea's monetary policy committee will operate currency policy going forward by checking the growth trend while aiming to stabilize the inflation rate at the target level over a medium-term horizon and paying attention to financial stability. The domestic economy is expected to maintain solid growth on continued strength in exports and investment and an expanding recovery in consumption, while prices are projected to rise above the target level for a considerable period due to the pass-through of accumulated expense pressures and increased demand-side pressures. From the financial stability perspective, it remains necessary to pay close attention to the rise in dwelling prices in the Seoul metropolitan area and the acceleration in household debt growth. Therefore, future currency policy will determine the timing and pace of additional increases while closely monitoring price and economic trends and financial stability conditions.
□ Of the decision to raise the base rate this time, six members of the Monetary Policy Committee supported it, while Commissioner Hwang Geon-il expressed the view that keeping the base rate at 2.75% would be desirable.