South Korea’s central bank, the Bank of Korea (BOK), announced on Wednesday its decision to hold steady its inflation target at 2%. Governor Rhee Chang-yong confirmed the decision, stating that this target will remain in place until the next policy review. This announcement comes as central banks worldwide grapple with fluctuating inflation rates and economic uncertainty.
Governor Rhee expressed confidence in the effectiveness of mechanisms implemented to combat recent high inflation. He projected inflation stability over the next two years, aligning with the 2% target maintained by other major central banks. This stability forecast allows the BOK to focus on supporting economic growth while keeping a close watch on inflationary pressures. The decision was made after a bi-annual review of the bank’s inflation-targeting monetary policy.
The BOK anticipates that a return to “low-inflation,” characterized by rates below 1%, is unlikely in the near term. The bank cited several factors contributing to this outlook. Expected economic growth in the upper-1% range, coupled with persistent price pressures stemming from a strong US dollar and the ongoing impacts of climate change, suggest a continued need for vigilance against inflation.
Recent economic data supports the BOK’s cautious approach. Last month, South Korean consumer inflation registered at 1.5%, lower than anticipated. This allowed the central bank to implement consecutive interest rate cuts, lowering the benchmark rate to 3.00% in an effort to stimulate the slowing economy. While this provides some breathing room, the BOK remains focused on the long-term inflation picture.
Looking ahead to 2025, the BOK projects consumer inflation to rise to the upper-1% range in the first half of the year, stabilizing near the 2% target in the latter half. The bank identified a weaker South Korean Won and rising public utility costs as key factors contributing to upward price pressure. These pressures are somewhat offset by lower oil prices, creating a complex interplay of inflationary forces. This nuanced understanding of the economic landscape underscores the BOK’s commitment to maintaining price stability.
