In a significant monetary policy move, the Bank of Korea has reduced its key policy interest rate to 3% from 3.25%. This decision marks the second consecutive meeting where the central bank has opted to lower rates, a response to easing inflation and a slowdown in the domestic economy. "Consumer price inflation temporarily fell significantly to 1.3% in October, reflecting the decline in petroleum product prices.
Core inflation, which excludes food and energy prices, has also slowed to 1.8%," stated the Bank of Korea in its prepared remarks. The central bank indicated it anticipates inflation will continue to moderate through 2025. While facing upward pressure from a rising exchange rate, inflation is projected to remain stable, buoyed by diminishing global oil prices and subdued demand.
The Bank forecasts consumer price inflation at 2.3% this year and 1.9% in the next, both figures revised down from earlier estimates of 2.5% and 2.1%, respectively. Like numerous other central banks globally, the Bank of Korea has a 2% inflation target, assessed by the national Consumer Price Index (CPI).
During the pandemic, South Korea's inflation rate surged, peaking at 6.3% in July 2022 due to government stimulus initiatives, supply-chain disruptions, and other pandemic-related business costs. The Bank of Korea began increasing interest rates in late 2021, with a recent peak policy rate set at 3.5% in January 2023.
The central bank had already cut the policy rate in October by 0.25% before this current reduction. The slowdown of South Korea's economic expansion has also contributed to the decision to trim interest rates, as indicated by the central bank. The nation's economic growth is anticipated to fall short of initial expectations amid heightened competition in critical export sectors and growing global trade protectionism.
The Bank of Korea forecasts an economic growth rate of 2.2% for this year and 1.9% for the following year, lower than previous estimates of 2.4% and 2.1%, respectively..