Korea: Bank of Korea keeps base rate unchanged at 1.75% for second consecutive month April
April 9, 2015
At its 15 May monetary policy meeting, the Bank of Korea (BoK) kept the base rate unchanged at a record low 1.75%. The decision met market expectations. The Bank made a surprise cut at its meeting in March in an attempt to boost growth, but kept the rate unchanged in April and again in May in order to assess incoming data and gauge the state of the economy. The economy has been struggling notably in recent quarters, although any potential rate cut will have to be balanced against risks, including high household debt and an expected interest rate hike in the United States.
In its accompanying statement, the BoK stated that it expects the global economy to continue growing at a moderate pace. The U.S. economy has shown signs of a temporary slowdown, the Euro area continues to improve, while growth in China and other emerging markets has slowed. Going forward, global growth will be centered around advanced economies, particularly the U.S., but may be affected by changes in monetary policy among several countries, sluggish emerging market growth, and geopolitical risks.
On the domestic front, the Bank pointed out that exports have continued to decline. Domestic demand indicators have fluctuated in recent months, although business sentiment has improved somewhat. As in previous statements, the Bank reiterated that it, “expects that the domestic economy will show a modest trend of recovery going forward, although the negative output gap will persist for a considerable time.”
Regarding price developments, the BoK stated that annual inflation was steady at 0.4% in April. Core inflation, which excludes agricultural and petroleum prices, inched down from 2.1% in March to 2.0% in April. The Bank expects that inflation will remain depressed this year due to low oil prices. The bank also noted that the Korean won has recovered somewhat against the U.S. dollar amid an expected delay of the U.S. Federal Reserves’ interest rate hike. In addition, the Bank warned that, “household lending has sustained its increasing trend at a level greatly exceeding that of recent years.” Finally, the Bank emphasized its commitment to balancing economic recovery with price and financial stability.
Author: Carl Kelly, Economist