Korea: Bank of Korea stands pat in July, upgrades economic outlook
July 13, 2017
At its 13 July meeting, the Bank of Korea (BoK) announced its unanimous decision to keep the base rate unchanged at an all-time low of 1.25%, as predicted by market analysts. The Bank struck a particularly optimistic tone in the press release that followed the meeting, raising its forecasts for GDP growth this year and next on account of a robust external sector and government plans for fiscal stimulus. The BoK last lowered interest rates by 25 basis points in June 2016 in what it had described as a preemptive move and has since refrained from making further changes to the main policy rates.
The Bank of Korea noted that, “the solid trend of domestic economic growth has continued, as exports and investment have improved although the pace of increase in consumption has remained week.” Although the Central Bank Governor stressed that the economic outlook did not take into account the fiscal stimulus package that President Moon Jae-in is pursuing, positive spillover effects on consumer confidence likely influenced the Bank’s decision.
The statement also alluded to inflation expectations being well anchored around the Central Bank’s 2.0% target level, where inflation has been hovering in recent months. The Bank pointed out that while economic growth is gathering momentum, demand-pull inflationary pressures are likely to remain subdued. Hence, the Bank seemed comfortable holding fire for the time being, given that an immediate interest rate hike could threaten the economic recovery and add to consumers’ repayment burdens at a time of record-high household debt.
According to the Governor, the Bank’s board is of the opinion that the BoK’s stance will turn less accommodative in the future, particularly as the U.S. Federal Reserve continues its tightening cycle. Accordingly, the Bank is likely to forge ahead with an interest rate hike in 2018 in order to quell fears related to the widening gap between Korean and U.S. interest rates. Nonetheless, there are several risks to this outlook, since most of the cyclical export drivers are set to fade away and the structural headwinds that weigh on household spending are expected to remain in place.
Author: David Ampudia, Economist