Korea Monetary Policy October 2017

Korea

Korea: Bank of Korea keeps rate unchanged in October, upgrades 2018 growth outlook

October 19, 2017

At its monetary policy meeting on 19 October, the Bank of Korea (BOK) decided to leave the base rate at its all-time low of 1.25%, where it has been since June 2016. Although market analysts had expected this decision, hawkish comments from Governor Lee Ju-yeol and a dissenting vote from Board member Lee Il-houng—which ended more than a year of unanimous decisions among the Board—came somewhat as a surprise and suggest that the Bank is edging closer to tapering its accommodative monetary policy.

At its meeting, the BOK upgraded its domestic economic growth forecast, noting that, “Exports seem likely to sustain their buoyancy, thanks largely to the global economic recovery, and domestic demand activities will also recover moderately due to the expansion in fiscal spending.” Inflation has been consistently close to reaching the BOK’s 2.0% target level in recent months, and the expectation is that it will continue to be so. Core inflation, on the other hand, has been below target. Despite a stronger economic outlook, the BOK therefore held its base rate steady in October.

Going forward, the BOK will base its monetary policy decisions on the prospects of continued economic growth, stable inflation and financial stability. Important considerations for a change to monetary policy—specifically for a rise in the base rate—include changes in the monetary policies of other major countries, international trade conditions affecting Korea and geopolitical risks. Also of consideration is the trend associated with high domestic household debt levels: Growth in mortgage lending has decelerated in recent months, and the government is set to announce additional policy measures to reduce household debt levels in October; this should reduce risks stemming from the BOK raising its base rate given that Korean households have high debt repayment commitments.

The Bank of Korea is likely to forge ahead with a base rate rise in 2018 as other major countries begin tightening their monetary policies. On average, FocusEconomics Consensus Forecast panelists expect the base rate to end 2018 at 1.53%, which is up 0.02 percentage points from last month’s forecast, and 2019 at 1.75%.


Author:, Economist

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Korea Monetary Policy October 2017 0

Note: BoK Base Rate in %.
Source: Bank of Korea (BoK).


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