Korea: Bank of Korea stands pat in July on subdued inflation and external risks
July 12, 2018
At its 12 July meeting, the Monetary Policy Board (MPB) of 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. The move in July was widely in line with market expectations, but it was not unanimous among the seven-member MPB, unlike at the last meeting. Lee Il-houng was the one member who voted to raise rates, leaving the governor, Lee Ju-yeol, having to downplay hawkish expectations at a news conference after the meeting.
The Bank slightly downgraded its GDP growth forecast from 3.0% in April to 2.9% in July, noting that employment growth is “sluggish”. This is likely because job creation in the January-to-June period this year, which amounted to 142,000 jobs, was the weakest since the global financial crisis. Meanwhile, inflation has been weak in recent months, and it remained steady from May at 1.5% in June, below the Bank’s 2.0% target. Core inflation likely attracted the MPB’s attention, given that it slowed to a five-month low in June. In terms of the global economy, although the Bank noted that growth is “robust”, it also said that volatility in international financial markets has increased, amid global trade protectionism. Overall, these factors led the BOK to maintain the status quo in July.
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. As household debt is high, the BOK also noted that it will continue to pay close attention to financial stability, which suggests that any future hikes will be gradual. Moreover, with uncertainty stemming from the monetary policy adjustments abroad and global trade tensions, the Bank said these factors could have a bearing on its future base rate stance. All in all, bearing in mind the new hawkish vote in the MPB in July, the outlook is likely to be one of gradual monetary policy tightening.
The next meeting of the BOK’s Monetary Policy Board is set for 31 August.
Author: Edward Gardner, Economist