Korea: Bank of Korea holds base rate at 1.50% in December pending potential U.S. Fed move
December 10, 2015
At its 10 December 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 sixth consecutive meeting in which the rate was kept on hold. An improving economic outlook and the looming Fed interest rate hike deterred the Bank from making a move.
In its accompanying statement, the BoK stated that while the U.S. economy continues to enjoy a sustained recovery and European economies make modest improvements, 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 domestic demand has continued to recover, particularly private consumption. However, exports are still stuck in a downward trend and the improvement in consumer and business confidence has been inadequate. 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 increased from 0.9% in October to 1.0% in November. Core inflation, which excludes agriculture and petroleum prices, rose from 2.3% to 2.4% in November. The Bank expects that low oil prices will keep inflation muted going forward. The Bank also noted that the Korean won has depreciated as the likelihood of an interest rate hike in the U.S. has been increasing.
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 14 January.
Author: Carl Kelly, Economist