BOK: "Tightening to continue until inflation is firmly on track for 2%"

Source

Bloomingbit Newsroom

Summary

The Bank of Korea said it will maintain a tightening stance until it is confident that inflation will stabilize at the target level (2%).
The BOK projects next year’s consumer inflation and core inflation to reach the mid-2% range and the low-to-mid 2% range, respectively, and said it will keep the tightening stance for the time being despite expectations for policy rate cuts.
The BOK said monetary policy should be conducted with close attention to household debt, liquidity and credit risks related to real estate project financing (PF), and the potential deterioration in debt-servicing capacity at marginal firms and vulnerable households.

Forecast Trend Report by Period

Monetary and Credit Policy Report for Next Year

"Real estate PF risks could grow"

The Bank of Korea (BOK) said on the 29th that it "will maintain a sufficiently restrictive stance for an extended period until it becomes confident that inflation will stabilize at the target level (2%)."

The BOK made the remarks in its '2024 Monetary and Credit Policy Operational Direction' report released the same day, explaining next year’s monetary policy stance. The BOK projects next year’s increases in consumer inflation and core inflation (excluding food and energy) to come to the mid-2% range and the low-to-mid 2% range, respectively. While that would represent a significant slowdown from this year’s 3.6% and 3.4%, it expected the pace of disinflation to be gradual. It forecast inflation converging to the target (2%) from the fourth quarter of next year onward.

Household debt was also cited as a key consideration for monetary policy. The BOK said "household loans are likely to see a larger increase, led by banks’ housing-related lending," adding that "monetary policy needs to be conducted with close attention to household debt." Contrary to market expectations that rate cuts could begin as early as the first half of next year, the BOK appeared to reaffirm that it will maintain the current tightening stance for the time being.

As for next year’s financial conditions, it assessed that they would "remain broadly stable" given high capital ratios that exceed regulatory requirements. However, it also noted the possibility that liquidity and credit risks related to real estate project financing (PF)—issues that have recently begun to surface—could materialize. It further warned that "if high interest rates persist for a prolonged period, the debt-servicing capacity of marginal firms and vulnerable households (low-income and credit-impaired multiple-debt borrowers) could weaken." The BOK also said it would strengthen research on low fertility and population aging, as well as artificial intelligence (AI).

Reporter Kang Jin-kyu josep@hankyung.com