The Bank of Korea's Monetary Policy Committee decided on October 22 to maintain the key interest rate at 3.00%. This marks a pause following two consecutive rate hikes in July and August. The committee stated that it is necessary to assess the developments of domestic and external risk factors and the impact of the two previous increases.
In its monetary policy direction statement, the committee noted, "The domestic economy continues to grow robustly, driven by exports and investment, while inflation remains elevated at around 3%. However, risks to financial stability persist, and uncertainties have increased due to the situation in the Middle East and monetary and fiscal policies in major countries."
The committee further explained, "The domestic economy is expected to maintain strong growth due to sustained export and investment performance, along with a gradual recovery in consumption. Inflation is projected to exceed target levels for an extended period due to accumulated cost pressures and increasing demand-side pressures." It emphasized the need to manage monetary policy carefully to ensure inflation stabilizes at target levels while monitoring financial stability.
The decision to hold the interest rate steady was unanimous among all seven committee members.
Full text of the monetary policy direction statement:
The Monetary Policy Committee has decided to maintain the Bank of Korea's key interest rate at the current level of 3.00% until the next monetary policy direction decision. The domestic economy continues to grow robustly, driven by exports and investment, while inflation remains elevated at around 3%. However, uncertainties have increased due to the situation in the Middle East and monetary and fiscal policies in major countries, necessitating a careful assessment of the developments of domestic and external risk factors and the impact of the two previous increases.
The global economy has seen heightened tensions in the Middle East, but solid growth continues, supported by strong investment in artificial intelligence (AI). Inflation is expected to remain high in the near term due to rising energy prices and supply chain disruptions. In international financial markets, long-term bond yields have surged due to expectations of rising inflation and interest rates in major countries, as well as concerns over fiscal health and corporate bond supply related to AI. Stock prices have shown volatility amid concerns over slowing profitability in the semiconductor sector, despite continued strong corporate earnings. The global economy and international financial markets are expected to be influenced by developments in the Middle East, AI investment outlooks, and changes in monetary and fiscal policies in major countries like the United States.
Domestically, the economy has shown stronger-than-expected growth, supported by robust exports and investment. Employment has continued to rise modestly, particularly in the service sector. The outlook suggests that the domestic economy will continue to benefit from favorable semiconductor market conditions, leading to sustained growth in exports and investment, while improving income conditions will gradually boost consumption. Consequently, growth rates for this year and next are expected to significantly exceed the forecasts made in August (3.3% and 2.9%, respectively). However, uncertainties related to the developments in the Middle East, the semiconductor market expansion, and changes in domestic and international financial conditions remain.
Regarding inflation, both consumer prices and core inflation (excluding food and energy) continued to rise in the late 2% range in September (2.9% and 2.8%, respectively). Short-term inflation expectations among the public remain in the late 2% range. Inflation is expected to exceed target levels for an extended period due to ongoing cost pressures and increasing demand-side pressures. The inflation rates for consumer prices and core inflation this year are expected to align with the August forecasts (2.7% and 2.5%, respectively), but next year's rates are anticipated to exceed previous projections (2.3% and 2.5%). Future inflation trajectories are subject to high uncertainty related to international oil prices, exchange rate movements, the pace of domestic recovery, and the spread of wage increases.
In the financial and foreign exchange markets, volatility in key price variables has increased. The won/dollar exchange rate has fallen significantly, supported by improvements in foreign exchange supply due to a large current account surplus, despite the strength of the dollar. Government bond yields initially surged due to worsening conditions in the Middle East, rising international oil prices, and soaring yields on major country bonds, but much of the increase was reversed due to expectations of improved government bond supply. Stock prices have dropped sharply amid concerns over declining profitability in the semiconductor sector. Household loans have decreased as other loans were repaid, while housing-related loans continued to rise, and the upward trend in housing prices in the metropolitan area has resumed.
The Monetary Policy Committee will continue to monitor growth trends while ensuring that inflation stabilizes at target levels over the medium term, paying close attention to financial stability. The domestic economy is expected to maintain strong growth due to sustained export and investment performance, along with a gradual recovery in consumption. Inflation is projected to exceed target levels for an extended period due to accumulated cost pressures and increasing demand-side pressures. Attention must remain on financial imbalances related to the housing market and household debt. Therefore, future monetary policy will be determined based on careful assessments of inflation, economic trends, and financial stability conditions, including the timing and pace of any further increases.
The decision to hold the key interest rate steady was supported unanimously by all members of the Monetary Policy Committee.
* This article has been translated by AI.
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