Korea: Bank of Korea surprisingly cuts base rate to 1.75% in an attempt to boost growth
March 12, 2015
At its 12 March monetary policy meeting, the Bank of Korea (BoK) decided to cut the base rate by 25 basis points to a record low 1.75%. The decision surprised the markets and followed a period of four consecutive meetings in which the rate was kept unchanged. The Bank had cut its rate twice in 2014 but explained that the most recent move was necessary to boost momentum in the sluggish economy. In doing so, the Bank joins a growing list of central banks around the world to introduce monetary easing measures.
In its accompanying statement, the BoK stated that it expects the global economy to continue growing at a moderate pace. While the US is growing at a solid rate, the Euro area is showing only modest improvements, and China is experiencing a slowdown. Going forward, global growth will be centered around advanced economies, particularly the US, but may be affected by changes in monetary policy among several countries, sluggish emerging market growth, and geopolitical risks.
On the domestic front, the Bank pointed out once again that export growth has decreased, while domestic demand and economic sentiment remain weak. The Bank, “expects that the domestic economy will show a modest trend of recovery going forward, although falling short of the originally forecast growth path. The period of continuation of the negative output gap will as a result be longer than had been anticipated.”
Regarding price developments, the BoK stated that annual inflation fell from 0.8% in January to 0.5% in February, driven mainly by lower global oil prices. In addition, core inflation, which excludes agricultural and petroleum prices, fell slightly from 2.4% in January to 2.3% in February. In previous statements, the Bank had stated that it expected inflation to rise gradually in the second half of the year, but now sees inflation holding for a longer time at a level lower than originally expected. The Bank also noted that the Korean won has depreciated further against the US dollar.
Author: Carl Kelly, Economist