Korea Monetary Policy August 2017

Korea

Korea: Bank of Korea keeps rate unchanged in August, reaffirms 2017 outlook

August 31, 2017

The Bank of Korea (BOK) held firm at its 31 August monetary policy meeting, keeping the base rate unchanged at an all-time low of 1.25%, where it has been since June of last year. The Bank’s decision, which was widely expected by market participants, came as authorities announced they would continue monitoring the effects of the government’s latest and most stringent measures to curb household debt, which stands at over 90% and is increasingly becoming policymakers’ biggest concern.

The Bank of Korea noted that, “the solid trend of domestic economic growth has continued, as exports have sustained their high rate of increase and consumption has recovered moderately although investment has temporarily slowed.” As such, the Board did not expect any major changes to their economic forecast for this year, as significant upside risks to growth—notably the government’s fiscal stimulus plan—are being offset by downside risks to the outlook, including mounting geopolitical risks.

The press release also stressed that inflation expectations remain well anchored around the Central Bank’s 2.0% target level. In addition, Bank officials saw no significant price pressures stemming from the domestic demand side, which vindicated the BOK’s current monetary stance. The Governor noted, however, that while they were monitoring recent measures introduced by the government to reign in soaring household debt levels, the risk these levels posed to overall growth meant the Central Bank is currently leaning towards tightening its stance.

While undoubtedly stronger than initially expected, the economy’s performance so far this year does not guarantee a rise in interest rates. Although the Governor believes that the Bank should intervene to curb household levels, the government’s macroprudential measures are more than likely to be enough in the short-term for the BOK to stand pat. Indeed, if the BOK forges ahead with higher rates too soon, households could feel the heat of mounting repayment needs, which could provoke economic fallout. On the other hand, acting too late could expose Asia’s fourth-largest economy to a severe downturn in the event of a housing market collapse. The debate will likely continue for as long as the government’s measures do not bear fruit.

The government is due to unveil fresh steps aimed at plugging a gap in household borrowing growth at some point in September, following measures implemented in early August to raise capital gains taxes on owners of multiple homes and impose mortgage curbs to combat speculative behavior.

The Bank is likely to forge ahead with an interest rate hike in 2018 in order to quell fears related to the widening gap between Korean and U.S. interest rates. Nonetheless, there are several risks to this outlook, since most of the cyclical export drivers are set to fade away and the structural headwinds that weigh on household spending are expected to remain in place. On average, FocusEconomics Consensus Forecast panelists expect the base rate to end 2017 at 1.26% and 2018 at 1.42%.


Author:, Economist

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