Korea: Bank of Korea holds base rate at 1.50% in first meeting of 2016
January 14, 2016
At its 14 January 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 seventh consecutive meeting in which the rate was kept on hold. While weakness in the external sector continues to weigh on economic growth, the Bank decided to stay put as it examines the longer-term impact of higher interest rates in the U.S. and developments in the Chinese economy.
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 while 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 normalization of U.S. monetary policy, volatility in Chinese financial markets, and changes in commodity markets.
On the domestic front, the Bank pointed out that domestic demand has continued to recover, thanks to strong private consumption. However, exports are still stuck in a downward trend and confidence levels remain low. The Bank projects that the domestic economy will continue to recover on strong demand dynamics, but uncertainty regarding overall growth is greatly due to unfavorable external conditions. According to its latest projections, the Bank expects the economy to grow 3.0% in 2016, which is down from the 3.2% previously forecast.
Regarding price developments, the BoK stated that inflation increased from 1.0% in November to 1.3% in December amid higher food prices and fading impact of the decline in oil prices. Core inflation, which excludes agriculture and petroleum prices, held at November’s 2.4% in December. The Bank expects that inflation will be 1.4% in 2016, which is short of its 2.0% target. The Bank also noted that the Korean won has continued to depreciate after the U.S Federal Reserve announced an interest rate hike and.
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 16 February.
Author: Carl Kelly, Economist