Korea: Bank of Korea holds base rate at 1.50% again in October amid uncertain environment
October 15, 2015
At its 15 October monetary policy meeting, the Bank of Korea (BoK) held its base rate at a record low 1.50%. The decision met market expectations and marks the fourth consecutive meeting in which the rate was kept on hold. The domestic economy is showing signs of improvement, but the ongoing export slump and high household debt levels are still significant concerns. The Bank cut its growth forecasts for the fourth time this year, and now expects GDP to expand 2.7% this year rather than 2.8%.
In its accompanying statement, the BoK stated that while the U.S. and European economies continue to enjoy a sustained recovery, growth in China and other emerging markets is slowing. 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, a potential increase in U.S. interest rates and persistently weak emerging market growth.
On the domestic front, the Bank pointed out that the consumption and investment are recovering, although exports are stuck in a downward trend and improvements in consumer and business confidence have been marginal. The Bank projects that the domestic economy will continue to recover on strong demand dynamics but uncertainty regarding overall growth is high due to unfavorable external conditions.
Regarding price developments, the BoK stated that inflation moderated from 0.7% in August to 0.6% in September. Core inflation, which excludes agricultural and petroleum prices, held in September at August’s 2.1%. The Bank expects that low oil prices will keep inflation muted throughout this year. The Bank also noted that the Korean won has appreciated against the U.S. dollar and Japanese yen due to a relative stabilization of the Chinese financial market and a delay in the Fed’s interest rate hike.
Finally, the Bank emphasized its commitment to balancing economic recovery with price and financial stability. Going forward, the Bank will closely monitor household debt trends and external risk factors. The next monetary policy meeting is scheduled for 12 November.
Author: Carl Kelly, Economist