Korea: Bank of Korea keeps its policy rate unchanged in December
December 15, 2016
At its 15 December monetary policy meeting, Korea’s Central Bank (BoK) decided to leave the base rate unchanged at a record low of 1.25%, a decision that markets had expected. The Bank has kept the main monetary policy rate unchanged for six straight months after slashing it by 25 basis points in June, which was the Bank’s first cut in nearly a year.
The BoK maintained its cautious wait-and-see approach to monetary policy, stating its belief that the Korean economy will continue to grow at a modest pace going forward, in line with a recovery of the global economy. However, the Central Bank considers that downside risks to future growth have increased slightly compared to the previous meeting, due to higher domestic and external uncertainty. On the domestic scene, the BoK highlighted the expansion in exports being marred by weak internal demand, while the unemployment rate remained constant in November on a year-on-year basis.
The BoK mentioned that inflation was stable in November, as the slowing oil price decline was counteracted by a slower increase in the prices of other industrial products. The BoK expects inflation to rise gradually towards its 2.0% target in the medium term on the back of increases in global oil prices. The Central Bank also pointed out that the Korean won has lost value relative to the U.S. dollar since the end of November, due to expectations of an imminent US interest rate hike; these expectations were met on the 14 December when the Federal Reserve increased its benchmark rate by 0.25 percentage points.
Looking ahead, the BoK has said it will conduct monetary policy to support the myriad goals of encouraging stronger economic growth, helping consumer price inflation reach the Central Bank’s target and ensuring financial stability.
Author: Oliver Reynolds, Economist