Korea Central Bank "Continued Base Rate Cuts Next Year... Increasing Downside Risks to the Economy"

Announcement of 2025 Monetary and Credit Policy Operation Plan

Strengthening Error Analysis of Economic Forecasts

The Korea Central Bank has announced that it will continue its policy of lowering the base rate next year. It is expected to focus on the economy with monetary policy in a situation where prices are stable. However, considering political uncertainties, the pace of U.S. rate cuts, and foreign exchange market instability, the pace of cuts will be decided flexibly.

In the report on the '2025 Monetary and Credit Policy Operation Direction' released on the 25th, the Korea Central Bank stated, "We will further lower the base rate while maintaining price stability, alleviating downward pressure on growth, and paying attention to financial stability risks."

Among the key variables, the economy was emphasized. The Korea Central Bank stated, "We will consider the increased downside risks to the economy due to heightened political uncertainty, intensified global competition in key industries, and changes in the trade environment, while expecting the inflation rate to maintain a stable trend."

However, the Korea Central Bank emphasized, "It is also necessary to pay attention to the impact of changes in major countries' monetary policies and domestic and international political uncertainties on exchange rate volatility," and "We will flexibly decide the pace of cuts while closely examining the trade-offs between policy variables."

Stabilizing the financial and foreign exchange markets was also set as a major goal of next year's monetary and credit policy. The current non-regular repurchase agreement (RP) purchases and other market stabilization measures will be extended if necessary, and additional stabilization measures will be implemented for excessive volatility in the foreign exchange market.

More effort will be put into external communication. The economic forecasts, which have sparked 'failure' controversies several times this year, will be accompanied by error analysis reports starting next year. The number of external public events by the Monetary Policy Committee members will also increase. The number of press conferences held by the Monetary Policy Committee members, which was three times this year, will be increased, and participation in external seminars will also be encouraged.

Improving conditional interest rate forecasts within three months is also being pursued. Currently, Monetary Policy Committee members express their opinions on what the interest rate will be three months after the monetary policy direction meeting. Next year, the Korea Central Bank is known to be considering expanding the horizon of such forecasts to six months.

Kang Jin-kyu, josep@hankyung.com