Korea: Bank of Korea makes second interest rate cut in three months
October 15, 2014
At its 14 October monetary meeting, the Bank of Korea (BoK) decided to reduce the base rate from 2.25% to 2.00%, which was in line with market expectations. The Bank’s decision followed a similar 25 basis-point cut in August, which marked the first change after 14 consecutive meetings in which it left the rate untouched. October’s reduction represents the second cut the BoK has implemented in three months.
In its accompanying statement, the BoK pointed out that it expects the global economy to continue growing at a moderate pace, mainly driven by economic growth in the United States, and that the Euro area’s economic recovery is expected to remain subdued. On the domestic front, the Bank recognized that, although exports have maintained healthy growth and consumption has improved, investment remains sluggish and economic sentiment has not fully recovered after the Sewol ferry disaster. Mirroring previous statements, the Bank again recognized that employment growth continues to be mainly supported by a higher number of workers in services, as well as gains in the labor market among workers aged 50 and over.
Regarding price developments, the BoK stated that inflation remains subdued, which is mainly the result of declining prices for industrial products and oil. Although the Central Bank expects that inflation will gradually increase going forward, it believes that for the time being inflationary pressures will remain weak.
Considering that investment and economic sentiment remain weak, the Central Bank decided to cut its base rate in order to boost growth. In addition, the Bank stated that it, “will closely monitor external risk factors such as the shift in the U.S. Federal Reserve’s monetary policy stance, as well as the trends of household debt and of capital flows. “
Author: Cecilia Simkievich, Economist