Korea: Bank of Korea cuts base rate to 1.50% amid ongoing economic malaise
June 11, 2015
At its 11 June monetary policy meeting, the Bank of Korea (BoK) cut its base rate by 25 basis points to a record low of 1.50%. The cut, which met market expectations, is the Bank’s fourth such move since August of last year and is intended to boost a struggling economy. The Korean economy is stuttering along, impacted in large part by falling exports, and there is growing concern that the outbreak of the Middle East Respiratory Syndrome (MERS) could drag down consumption and investment in the short term.
In its accompanying statement, the BoK stated the U.S. economy has shown signs of picking up after a temporary slowdown, while growth in China and other emerging markets has slowed. Going forward, global growth will be centered around advanced economies, particularly the U.S., but may be affected by changes in monetary policy among several countries, sluggish emerging market growth, and the Greek debt crisis.
On the domestic front, the Bank pointed out that exports have continued on a downward trend. Moreover, consumption had started to recover but is now faltering again due to the MERS outbreak. The Bank explained that the risk of the economy performing below potential in the near term has grown due to ongoing sluggish exports and fallout from MERS.
Regarding price developments, the BoK stated that annual inflation increased slightly from 0.4% in April to 0.5% in May. Core inflation, which excludes agricultural and petroleum prices, inched up from 2.0% in April to 2.1% in May. The Bank expects that inflation will remain depressed this year due to low oil prices. The bank also noted that the Korean won has depreciated against the U.S. dollar amid strengthened expectations of a U.S. Federal Reserve interest rate hike. In addition, the Bank warned that, “household lending has sustained a trend of increase at a level substantially exceeding that of recent years, led by mortgage loans.” Finally, the Bank emphasized its commitment to balancing economic recovery with price and financial stability.
Author: Carl Kelly, Economist