Korea: Bank of Korea keeps base rate at 1.50%, waits for earlier cuts and government stimulus to take effect
July 9, 2015
At its 9 July monetary policy meeting, the Bank of Korea (BoK) decided to keep its base rate at a record low of 1.50%, as expected by the market. The Bank cut the rate to its current level at its previous meeting in June in an attempt to boost the struggling economy. The Bank decided to hold the base rate this month as it waits for the effect of earlier rate cuts and the government’s USD 20 billion stimulus package to work through the economy. Concerns that the outbreak of the Middle East Respiratory Syndrome (MERS) would push the already fragile economy into an even harsher downward cycle prompted the government to roll out a supplementary budget in late June.
In its accompanying statement, the BoK acknowledged that the U.S. economy is on a recovery path and that the Euro area economies are improving as well. However, growth in China and other emerging markets is slowing. Going forward, global growth will be centered around advanced economies, particularly the U.S., but may be affected by the Greek debt crisis, changes in monetary policy among several countries, and sluggish emerging market growth.
On the domestic front, the Bank explained out that exports have continued on a downward trend. Moreover, consumption and business sentiment have declined due to the MERS outbreak. The Bank expects the domestic economy to recover going forward as the government’s stimulus package kicks in and the impact of the MERS shock subsides, but uncertainties regarding the growth path are high. The BoK lowered its GDP growth forecast for 2015 to 2.8% from the 3.1% projection made in April.
Regarding price developments, the BoK stated that annual inflation increased slightly from 0.5% in May to 0.7% in June. Core inflation, which excludes agricultural and petroleum prices, inched down from 2.1% in May to 2.0% in June. The Bank expects that inflation will remain depressed this year due to low oil prices. The Bank also noted that the Korean won has depreciated against the U.S. dollar amid expectations of a U.S. Federal Reserve interest rate hike and fallout from the Greek crisis. 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