Korea Monetary Policy

Korea

Korea: Bank of Korea holds interest rates at August's low

September 12, 2014

At its 12 September monetary policy meeting, the Bank of Korea (BoK) decided to leave the base rate unchanged at 2.25%. The Bank cut the base rate by 25 basis points at its August meeting, which marked the first cut after 14 consecutive meetings in which it left the rate unchanged. The Bank’s decision came after the government’s presentation of the stimulus package on 24 July, which, according to analysts, will create synergy with the government’s policies to boost economic growth. The decision to keep the rate at August’s low level was in line with market expectations.

In its accompanying statement, the BoK pointed out that it expects the global economy to maintain modest growth, sustained by economic growth the United States, while the Eurozone recovery is expected to slow. On domestic developments, the Central Bank recognized that although exports have maintained healthy growth, domestic demand is still sluggish, mainly due to weak economic sentiment among Korean consumers and businesses in the wake of the Sewol ferry disaster. Mirroring previous statements, the Bank again recognized that employment growth continues to be supported mainly by a higher number of workers in services as well as gains in the labor market among workers aged 50 and over.

Moreover, the BoK stated that inflation remains subdued, mainly as a result of declining prices for agricultural products and oil. Although the Central Bank expects that inflation will gradually increase going forward, it believes that for the time being inflationary pressures remain contained.

The Central Bank concluded that authorities will continue to conduct monetary policy in a manner aimed at containing inflation within the Bank’s target, while supporting economic growth. In addition, the Bank stated that, “it will closely monitor external risks factors such as shifts in major countries’ monetary policies, changes in economic agents’ sentiment and movements of future economic indicators including the household debt trend, while observing the effects of last month’s Base Rate cut and the government’s economic policies.”

FocusEconomics Consensus Forecast panelists expect the base rate to end 2014 at 2.30%. In 2015, panelists see the policy rate ending the year at 2.56%.


Author: Angela Bouzanis, Senior Economist

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Korea Monetary Policy September 2014

Note: BoK Base Rate in %.
Source: Bank of Korea (BoK).


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