Korea: Bank of Korea holds base rate at 1.50%
August 14, 2015
At its 13 August monetary policy meeting, the Bank of Korea (BoK) held its base rate at a record low 1.50%. The decision met market expectations. The Bank cut the base rate a fourth time in less than a year at its last meeting, in June, in an attempt to boost the struggling economy. While the impact of the MERS outbreak is receding, falling exports remain a significant concern. However, the Bank decided to wait and gauge the effect of the USD 9.8 billion supplementary budget introduced in July and spillover from China’s devaluation of the yuan.
In its accompanying statement, the BoK stated the U.S. and European economies are enjoying a sustained recovery, 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 the Federal Reserve’s monetary policy, devaluation of the Chinese yuan, and sluggish emerging market growth.
On the domestic front, the Bank pointed out that exports have continued on a downward trend. However, consumption and market sentiment have improved after the MERS scare. The Bank explained that the domestic economy should recovery steadily due to the government’s expansionary budget policies and as the effects of the MERS outbreak fade completely. However, uncertainties reading the growth path are still high due to volatile external conditions.
Regarding price developments, the BoK stated that annual inflation held at June’s 0.7% in July. Core inflation, which excludes agricultural and petroleum prices, was also unchanged at 2.0%. 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 and Japanese yen amid expectations of a U.S. Federal Reserve interest rate hike and the devaluation of the Chinese yuan. 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