Monetary Policy Board: "Inflation to Remain Elevated for Considerable Period... Unanimous Rate Hike Decision"

July Policy Statement from the Monetary Policy Board Meeting

Yonhap News Agency

On July 16, the Bank of Korea's Monetary Policy Committee raised the base interest rate by 0.25 percentage points to an annual 2.75%. The committee cited as reasons that, while the growth trend is strengthening, the inflation rate is expected to remain above the target level for a considerable period and financial stability risks also persist.

The Monetary Policy Committee of the Bank of Korea announced in a statement distributed on the morning of July 16 that "all seven committee members agreed with this rate hike decision."

The MPC expects domestic inflation to remain at a relatively high level for a considerable period, despite a decline in international oil prices. The committee noted that the impacts of previously elevated costs and exchange rates will continue, and demand-side pressures due to income improvements are expected to gradually expand. It added, "This year's consumer price inflation rate should be broadly aligned with the May outlook of 2.7%; however, core inflation is expected to exceed the previous forecast."

The committee assessed that the domestic economy has seen an expansion of growth, with exports and investment—particularly in the semiconductor sector—maintaining a strong upward trend, and consumer spending remaining favorable. "Going forward, we expect exports and investment to continue their high growth, aided by the positive semiconductor market, and for consumption to further recover on the back of improved income conditions, sustaining a robust growth trend. As a result, this year's GDP growth rate is expected to significantly surpass the May forecast of 2.6%," the committee said.

Regarding financial and foreign exchange markets, the committee observed, "Volatility of key price variables such as exchange rates, government bond yields, stock prices, household loans, as well as metropolitan housing prices, has expanded sharply." It also stated, "From a financial stability perspective, it is necessary to continue monitoring the high volatility of exchange rates, rising metropolitan housing prices, and accelerating growth of household debt."

The committee stated, "We believe that the current monetary policy stance of raising interest rates needs to be maintained going forward. The timing and pace of additional increases will be determined by closely examining the degree of inflationary pressure, the economic improvement trend, and financial stability conditions."

Below is the full text of the Monetary Policy Committee's decision on the direction of monetary policy.

Shin Hyun-song, Governor of the Bank of Korea, attended the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul on the morning of the 16th, and struck the gavel. 2026.07.16. Photo by the Joint Press Corps

The Monetary Policy Committee has decided to operate monetary policy by raising the Bank of Korea base rate from the current level of 2.50% to 2.75% until the next policy rate decision. With the growth trend strengthening, led by exports and investment, the inflation rate is expected to remain above the target level for a considerable period, and risks to financial stability persist. Therefore, the committee judged it appropriate to raise the base rate by 0.25 percentage points.

The global economy is expected to maintain a gentle growth trend thanks to steady AI investments, despite ongoing uncertainties in the Middle East. In terms of price developments, the effects of past energy price increases are likely to drive inflation higher for some time. In global financial markets, the U.S. dollar has strengthened amid expectations of U.S. Federal Reserve rate hikes and evolving Middle East developments, and government bond yields have risen. Stock prices have shown significant fluctuations in response to changing prospects for AI and the semiconductor industry. Going forward, the global economy and international financial markets are expected to be influenced by factors such as the progress of U.S.-Iran ceasefire negotiations, AI investment prospects, major countries' monetary and fiscal policy changes, and evolving trade environments.

The domestic economy has continued to experience strong growth in exports and investment, centered around semiconductors, with consumption maintaining a positive trend. In terms of employment, the number of people employed turned to growth, particularly in the service sector, but major industries such as manufacturing still faced declines. Going forward, the domestic economy is expected to continue a robust growth trajectory, as strong semiconductor demand drives both exports and investment, and consumption recovers further amid improved income conditions. Accordingly, this year’s growth rate is expected to significantly exceed the May forecast of 2.6%. However, there remains uncertainty surrounding the future growth path, relating to the degree of expansion in the semiconductor market, the spillover effects on domestic demand, developments in the Middle East, and changes in the trade environment.

Regarding inflation, in June, the consumer price inflation rate rose to 3.2%, driven by persistently high petroleum prices and increased prices for agricultural, livestock, and fisheries products. The core inflation rate (excluding food and energy) remained at 2.5%, the same as the previous month. One-year ahead inflation expectations among the general public remained in the upper 2% range. The inflation rate is expected to remain elevated for a considerable period, as the impact of previously increased costs and exchange rates persists and demand-side pressures from income gains strengthen, even though international oil prices have fallen. Thus, this year's consumer price inflation rate should generally align with the May projection (2.7%), but the core inflation rate is expected to be somewhat higher than the previous forecast (2.4%). Looking ahead, there is significant uncertainty for the inflation path, connected with changes in international oil prices and exchange rates, the speed of domestic demand recovery, and the extent of wage increases.

In financial and foreign exchange markets, volatility in major price variables has increased significantly. The won-dollar exchange rate, which had climbed to the mid-1,500 KRW range due to foreign capital outflows from the stock market and U.S. dollar strength, has fallen back to the upper 1,400 KRW range amid improved foreign exchange supply and demand. Government bond yields have risen, influenced by shifting expectations for monetary policy both domestically and abroad, while stock prices have experienced considerable volatility and significant corrections—in part due to concerns over AI investment and a large net selling of stocks by foreigners. Household loans saw a sharp rise, as both housing-related loans and other types of loans increased, and upward pressure on metropolitan housing prices intensified.

The Monetary Policy Committee will continue to monitor the growth trend while conducting monetary policy with a medium-term perspective to ensure the inflation rate stabilizes at the target level and maintaining vigilance regarding financial stability. The domestic economy is expected to sustain its sound improvement in both exports and domestic demand, as the positive effects of a robust semiconductor market ripple through the broader economy. Meanwhile, inflation is forecast to stay above the target for a considerable period, as previously elevated cost pressures and rising demand-side pressure persist. From a financial stability standpoint, it remains necessary to pay close attention to high exchange rate volatility, surging metropolitan housing prices, and the accelerating growth of household debt. Therefore, the current stance of raising interest rates should be maintained. The timing and pace of further rate hikes will be determined by closely monitoring the degree of inflationary pressure, the trend of economic improvement, and financial stability conditions.

All seven members of the Monetary Policy Committee agreed with the decision to raise the base interest rate this time.

This content was produced with the assistance of AI translation services.