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Korea Monetary Policy April 2018

Korea: Bank of Korea keeps base rate unchanged in April, sends dovish short-term signals

At its 12 April meeting, the Monetary Policy Board of the Bank of Korea (BOK) decided to keep the base rate unchanged at 1.50%, a move that was widely expected by market analysts. In November of last year, the BOK raised the base rate for the first time in over six years, upping it from 1.25% to 1.50% and heralding the beginning of tighter monetary policy in Korea. April’s decision was part of that gradual tightening process.

The Bank’s decision to stand pat came amid weak inflation so far this year—hindering any chance of a hike in April—mainly due to falling prices of livestock products and weaker price increases for petroleum products. Core inflation, meanwhile, has remained downbeat, despite creeping higher in March. By the end of this year, however, the BOK expects inflation to pick up somewhat and approach the 2.0% target. The domestic economy, meanwhile, has continued to show strength in recent months, despite a slowdown at the end of last year. However, robust growth has yet to generate substantial price pressures.

Looking ahead, and in line with the policy direction communicated at its earlier meeting in February, the Bank emphasized it will continue implementing monetary policy with a focus on supporting economic growth, stabilizing inflation at its 2.0% target and ensuring financial stability. The BOK will also keep an eye on external risks—particularly the direction of monetary policy internationally and the degree of protectionism among Korea’s trading partners—to help determine its future policy adjustments. With our panelists expecting inflation to gradually rise back towards target later this year and growth to remain robust, most see the BOK raising rates once in 2018.

Meanwhile, given that the Bank downgraded its inflation forecast for this year at its April meeting, analysts at Nomura, one of our panelists, reconsidered the timing of a potential rate hike: “We are pushing back our call for the next rate hike from May to July 2018  […]. This is because the BOK trimmed its 2018 CPI inflation forecast from 1.7% to 1.6% and dovish MPC members […] will focus more on low inflation than financial imbalances.”

The next meeting of the BOK’s Monetary Policy Board is set for 24 May.

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