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Korea Monetary Policy August 2018

Korea: Bank of Korea stands pat in August

At its 31 August monetary policy meeting, the Bank of Korea (BOK) decided to keep the base rate unchanged at 1.50% amid slow job growth, weak inflation and economic risks from abroad. 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. However, like at the last meeting in July, the BOK’s Monetary Policy Board (MPB) was not unanimous among its seven members, with Lee Il-houng once again dissenting from his colleagues and voting to raise rates.

The economy performed well in the first half of 2018, maintaining last year’s growth momentum. However, despite this, job creation has been lackluster, with only 5,000 jobs created in July compared to the same month a year earlier, the weakest annual improvement since January 2010. Moreover, inflation has been low in recent months, remaining at 1.5% in July for the third consecutive month, well below the Bank of Korea’s 2.0% target. The Bank also noted at its August monetary policy meeting that inflation is likely to remain in the mid-1% range “for some time”. Core inflation, meanwhile, fell to 1.1% in July. In terms of the external environment, although the BOK specified that global growth was “robust”, it also referred to increase volatility in international financial markets. All in all, the BOK decided to maintain the status quo in August.

In its post-meeting communiqué, the Bank of Korea highlighted that it will conduct monetary policy to ensure the economy continues growing and that inflation is stabilized at around 2.0% in the medium term. Amid high household debt, the BOK also emphasized that it will continue to pay close attention to financial stability, which suggests that any future hikes as part of a monetary policy tightening will be gradual. Moreover, with uncertainty stemming from the monetary policy adjustments abroad and global trade tensions, the Bank said that these factors could have a bearing on its future base rate, suggesting that the current status quo could be prolonged further if uncertainty mounts and takes a toll on economic activity.

The next meeting of the BOK’s Monetary Policy Board is scheduled for 18 October.

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