 Bank of Korea Governor Lee Jung-yong hitting the gavel during the Monetary Policy Committee meeting at the Bank of Korea in Jung-gu, Seoul on the 11th./Photo=news1 |
Bank of Korea has lowered the base interest rate by 0.25%. The reason for this decision is said to be due to the stable inflation rate and the start of a slowdown in household debt growth as the government strengthens its macroprudential policies.
The Bank of Korea’s Monetary Policy Committee has decided to lower the base interest rate from 3.50% to 3.25% at the Monetary Policy Direction Decision Meeting held on the 11th.
According to the Monetary Policy Direction Statement released by the Bank of Korea, “The domestic inflation rate has shown a clear stabilization trend,” and “the consumer price index is expected to slightly fall below 2% in the near future, leading to a slight decrease in the annual inflation rate compared to the August forecast of 2.5%.”
However, it also stated, “Uncertainty in the growth outlook has increased,” and “while the growth of housing prices in the Seoul metropolitan area and the growth trend of household debt are expected to gradually slow down due to the impact of strengthened macroprudential policies, caution is still needed regarding the risks related to the impact of interest rate cuts on household debt.”
The Monetary Policy Committee has decided to lower the Bank of Korea’s base interest rate from the current level of 3.50% to 3.25% until the next Monetary Policy Direction Decision meeting. The decision was made based on the clear stability in the inflation rate and the start of a slowdown in household debt growth due to the government’s strengthened macroprudential policies, as well as a slight easing of foreign exchange market risks.
The global economy continues its moderate growth trajectory, but uncertainty remains high in the economic outlook of major countries, and inflation continues to decline. In the international financial markets, long-term government bond yields and the U.S. dollar index experienced declines and rebounds influenced by changes in expectations regarding the pace of rate cuts by the U.S. Federal Reserve, risks in the Middle East, and China’s economic stimulus measures. Moving forward, the global economy and international financial markets are expected to be influenced by factors such as the economic situations and policy changes in major countries, geopolitical risks, and political situations in major countries.
While exports in the domestic economy have continued to grow, the recovery in domestic demand remains sluggish. Employment growth has gradually slowed down, but the unemployment rate has remained at a low level. The outlook for the domestic economy indicates a moderate growth path going forward, but uncertainties have increased compared to the forecast in August (2.4% for this year, 2.1% for next year). The future growth path is expected to be influenced by the speed of domestic demand recovery, the economic conditions in major countries, and the trends in IT exports.
The domestic inflation rate has shown a clear stabilization trend. In September, the consumer price index fell to 1.6% due to a significant drop in petroleum prices, and the core inflation rate (excluding food and energy prices) decreased to 2.0%. Short-term inflation expectations also declined to 2.8%. It is expected that the inflation rate will continue to follow a stable trend due to low demand pressures in the future.
The consumer price index is expected to fall below 2% in the near future, leading to a slight decrease in this year’s inflation rate compared to the August forecast of 2.5%. The core inflation rate is expected to continue a stable trend around 2%, aligning with the previous forecast for this year (2.2%). The inflation rates for next year are expected to be generally in line with the previous forecasts (2.1% for consumer prices and 2.0% for core inflation), but there are uncertainties related to the developments in international oil prices due to geopolitical risks, exchange rate movements, public utility adjustments, and other factors.
In the financial and foreign exchange markets, long-term government bond yields in Korea experienced a decline and rebound in line with changes in expectations for domestic and foreign monetary policies, and the USD/KRW exchange rate fluctuated influenced by trends in the U.S. dollar, geopolitical risks, and other factors. In the housing market, price growth in the Seoul metropolitan area slowed down and transaction volume decreased, while weakness continued in regional markets. As a result, the growth of household loans also saw a significant reduction.
The Monetary Policy Committee will continue to operate the monetary policy with a focus on examining the growth trajectory while ensuring that the inflation rate stabilizes at the target level in the medium term and being vigilant about financial stability.
Although it is expected that the domestic economy will continue to follow a stable path with the inflation rate stabilizing at the target level, uncertainties have increased in the growth outlook. While the slowdown in household debt growth and housing prices in the Seoul metropolitan area are expected to gradually ease due to the impact of strengthened macroprudential policies, caution is still needed regarding risks related to the impact of interest rate cuts on household debt.
Therefore, future monetary policy decisions will be carefully made, taking into account the potential trade-offs among policy variables such as inflation, growth, and financial stability, and determining the pace of future rate cuts cautiously.