Korea: Bank of Korea keeps base rate unchanged in January
January 18, 2018
On 18 January, at its first monetary policy meeting of the year, the Bank of Korea (BOK) kept its base rate unchanged at 1.50%. At its previous meeting in December, it increased the base rate for the first time in over six years. Both of these decisions, in December and again in January, were expected by market participants. The BOK is widely considered to now be in the process of slowly winding down years of accommodative monetary policy.
The Bank of Korea, in leaving its base rate unchanged, was partly influenced by the country’s low inflationary pressures in recent months, which have mainly been due to weaker price increases in agricultural, livestock and fishery products. Core inflation, meanwhile, has been stuck in the mid-1% range. The BOK noted that inflation is expected to be below its 2.0% target level in the short term before gradually accelerating towards target by the end of the year. Counterintuitively, the low rate of inflation has come despite a strong economy—economic growth hit an over three-year high in the third quarter last year. Separately, in recent months, positive developments have been observed in terms of financial stability: Household lending growth, which has been high for many years, has slowed, while increases in housing prices have moderated.
Looking ahead, the Bank of Korea noted it would continue implementing monetary policy with a focus on supporting economic growth, price stability and financial stability. Given that households face an aggregate debt burden of over USD 1 trillion, the Bank must tread carefully when tightening monetary policy in order not to financially overburden them. Additional considerations for the BOK will be how major countries around the world move to adjust their respective monetary policies; trading conditions with major economic partners, particularly the Unites States, with whom the Korean government is engaged in a review of the two countries’ bilateral free trade agreement; and geopolitical risks, especially related to North Korea, which are highly volatile.
Korea Interest Rate Forecast
At its monetary policy meeting on 18 January, the Bank of Korea lowered its inflation forecast for 2018 to 1.7%, down from 1.8%. In line with its wind-down of accommodative monetary policy, the BOK is expected to continue tightening policy this year, albeit gradually. On average, FocusEconomics Consensus Forecast panelists expect the base rate to end 2018 at 1.84% and 2019 at 2.03%.
Author: Edward Gardner, Economist