Korea: Bank of Korea keeps base rate on hold
May 25, 2017
At its 25 May meeting, the Bank of Korea (BoK) decided to maintain the base rate stable at an all-time low of 1.25%, a move that market analysts had expected. The base rate was last altered in June 2016 when it was cut 1.25%.
The decision came as inflation remains anchored at around the Bank’s inflation target rate of 2.0% and the Bank expects that it will remain around the target level for the whole year. Moreover, Korea’s economic growth expanded healthily in Q1 on the back of robust growth in the export, investment and construction sectors. Although consumption remains weak, in April, consumer confidence rose above the critical 100-mark signaling optimism among Korean households for the first time in six months as geopolitical tensions and domestic political uncertainty eased.
The statement by the Bank provided evidence that the base rate will remain unaltered for the time being as it aims to ensure the recovery of economic growth and consumer price inflation stability over the medium-term horizon. However, newly-elected President Moon Jae-in’s proposed stimulus plan has the potential to spur inflationary pressures, adding pressure to the Bank of Korea to tighten its monetary policy. Moreover, this situation could be exacerbated by the ongoing monetary policy normalization in the United States as, traditionally, interest rate hikes by the U.S. Federal Reserve are followed by rate increases in Korea to prevent an outflow of foreign capital. Against this backdrop, BoK’s Governor Lee Ju-yeol warned that, “I still maintain my previous view that Korea will not ‘mechanically’ follow the steps of the US rate hikes”.
Author: Jan Lammersen, Economist