Korea: Bank of Korea holds base rate at 1.50%
September 11, 2015
At its 11 September monetary policy meeting, the Bank of Korea (BoK) held its base rate at a record low 1.50%. The decision met market expectations. This is the third consecutive meeting in which the rate was kept on hold after in June when the Bank had cut the base rate a fourth time in less than a year 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 uncertainties for the Korean economy from China’s slowdown and financial market volatility as well as a potential rise in U.S. interest rates as soon as in September.
In its accompanying statement, the BoK stated that while the U.S. and European economies are enjoying a sustained recovery, growth in China and other emerging markets has moderated. The Bank expects that going forward, global growth will center in advanced economies, particularly the United States. However, the global economy may be affected by volatility in international financial markets resulting from the devaluation of the Chinese yuan, financial market turmoil, a potential lift of U.S. interest rates in September and persistently weak emerging market growth.
On the domestic front, the Bank pointed out that exports have continued on a downward trend and that the recovery in consumption and market sentiment after the MERS scare has been “inadequate.” In addition, the Bank noted that employment grew at a slower rate in August, largely due to a base-effect, and that the unemployment rate increased. While the Bank projects a recovery in the domestic economy, it pointed out that uncertainties regarding the global economic outlook had increased compared to the last month due to volatile external conditions.
Regarding price developments, the BoK stated that annual inflation held at July’s 0.7% in August. Core inflation, which excludes agricultural and petroleum prices, picked up marginally to 2.1% in August. The Bank expects that the low oil price will keep inflation muted throughout this year. The Bank also noted that the Korean won has depreciated against the U.S. dollar and Japanese yen after the devaluation of the Chinese yuan and volatility in the Chinese financial market. 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