SEOUL, Aug. 27 (Yonhap) -- The following is the full text of a statement by the Bank of Korea (BOK) on its monetary policy decision Thursday, where the central bank raised the key rate by 25 basis points to 3 percent at its rate-setting meeting in Seoul.
The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 25 basis points from 2.75 percent to 3 percent. While the domestic economy has continued to grow at a stronger than expected pace, supported by strong exports and a recovery in domestic demand, inflation is expected to remain above the target level for a considerable time. In this context, it is important to prevent inflationary pressures from becoming widespread through preemptive action, and it is also necessary to continue paying attention to financial stability risks. The Board, therefore, judged that it is appropriate to raise the Base Rate by 25 basis points.
The currently available information suggests that the global economy is expected to grow at a moderate pace, driven by robust AI investments, despite continued tensions in the Middle East, while inflation is projected to remain elevated for some time due to the impact of the rise in energy prices. In global financial markets, long-term government bond yields rose and the US dollar weakened as concerns about fiscal soundness in major economies grew, amid continued uncertainties surrounding the US Federal Reserve's monetary policy and the situation in the Middle East. Stock prices generally rose, reflecting favorable corporate earnings, despite concerns over the profitability of global AI investments. Looking ahead, the global economy and financial markets will be affected by developments in the Middle East, by the AI investment outlook, and by changes in monetary and fiscal policies in major economies and in the trade environment.
The domestic economy maintained strong growth, led by exports and investment. The number of persons employed continued to increase moderately, mainly in the services sector. Going forward, the domestic economy is expected to continue its robust growth as exports and investment sustain their high growth on the back of a strong semiconductor sector and as the recovery in consumption gradually accelerates, supported by improving income conditions. Consequently, the growth rate is forecast at 3.3 percent for this year and 2.9 percent for next year, both significantly higher than the May forecasts of 2.6 percent and 2.1 percent, respectively. There remain uncertainties along the future path of economic growth related to the degree of expansion in the semiconductor sector and its spillover onto domestic demand, developments in the Middle East, and changes in the trade environment.
Consumer price inflation declined to 2.8 percent in July due to slower increases in the prices of petroleum products and agricultural, livestock, and fisheries products, while core inflation (excluding food and energy) rose to 2.6 percent, driven by faster increases in the prices of personal services and durable goods. Short-term inflation expectations among the general public remained in the upper 2 percent range. Looking ahead, inflation is expected to remain above the target level for a considerable time as the pass-through of elevated cost pressures persists and as demand-side pressures also gradually increase with improving income conditions. Consequently, consumer price inflation is forecast at 2.7 percent for this year and 2.3 percent for next year, both consistent with the May projections, while core inflation (excluding food and energy) is forecast at 2.5 percent for both this year and next year, higher than the May forecasts of 2.4 percent and 2.3 percent, respectively. The future path of inflation is judged to be subject to high uncertainties related to movements in global oil prices and the exchange rate, to the pace of the recovery in domestic demand, and to the extent of the broadening of the increase in wages.
In financial and foreign exchange markets, volatility in major price variables has remained high. The Korean won to U.S. dollar exchange rate fell significantly as foreign exchange market supply-demand conditions improved due to a moderation in foreign investors' stock investment outflows and a weakened U.S. dollar. Korean Treasury bond yields fluctuated considerably, affected by stronger domestic economic growth and by movements in U.S. Treasury bond yields and global oil prices. Stock prices fell sharply, led by the semiconductor sector, and then partially rebounded. Housing prices in Seoul and its surrounding areas continued to increase at a high pace while household loans also increased substantially.
The Board will continue to conduct monetary policy in order to stabilize consumer price inflation at the target level over the medium-term horizon as it monitors economic growth while paying attention to financial stability. The domestic economy is expected to continue its robust growth, supported by sustained strong exports and investment, and by a strengthening recovery in consumption, while inflation is projected to remain above the target level for a considerable time, driven by the pass-through of accumulated cost pressures and increasing demand-side pressures. Regarding financial stability, it is necessary to continue to pay attention to acceleration in both housing price increases in Seoul and its surrounding areas and household debt growth. Therefore, the Board will decide the timing and pace of further increases in the Base Rate while assessing the trends in inflation and the domestic economy, as well as financial stability.
Six Monetary Policy Board members supported the decision to raise the Base Rate, while one member, Hwang Kunil, voted against the decision, proposing to keep the Base Rate unchanged at 2.75 percent.
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