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Korea Monetary Policy October 2018

Korea: Bank of Korea leaves rates unchanged in October but sends more hawkish signals

At its 18 October monetary policy meeting, the Bank of Korea (BOK) kept the base rate unchanged at 1.50% amid sluggish labor market conditions and weak core inflation. The base rate has remained at 1.50% since the hike in November last year and this latest decision was in line with market analysts’ expectations. At the October meeting, two of the seven-member Monetary Policy Board (MPB) dissented from the prevailing decision and voted for a 0.25 percentage-point hike, up from just one member at the previous meeting on 31 August.

The economy has performed well recently. Strong growth momentum from last year was sustained in the first half of this year, although it appears the economy decelerated in the third quarter. However, buoyant economic activity has not translated into labor market gains, with unemployment rising from 3.6% in January to 4.0% in September. On the price front, inflation hit a one-year high of 1.9% in September, just below the BOK’s 2.0% target rate. Despite this acceleration, core inflation remained subdued.

The Bank of Korea appeared slightly more hawkish at its October monetary policy meeting than in August. In addition to an extra MPB member voting for a rate rise, the post-meeting communiqué noted that inflation is likely to “fluctuate in the mid- to upper-1% range” going forward, representing a change from its “[remain] in the mid-1% range for some time” expectation in August. Moreover, the Bank appeared to put greater emphasis on how housing prices have increased in recent months, particularly in parts of Seoul, and that household debt growth has continued to outstrip income growth. All these developments suggest the BOK is increasingly becoming aligned to a rate hike in the coming months, possibly as early as its next monetary policy meeting on 30 November. Once again, the Bank noted in October that it will make its policy decisions based on ensuring the economy continues to grow and that inflation is stabilized at around 2.0% in the medium-term, while monitoring financial stability.

Korea Interest Rate Forecast

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