Korea: BoK keeps rates unchanged for third time in September
September 9, 2016
At its 9 September monetary policy meeting, the Bank of Korea (BoK) announced that it will keep the base rate at a record-low of 1.25%, which was widely anticipated. This is the third month in which Central Bank has held the main monetary policy rate unchanged after having slashed it by 25 basis points in June. It was the Bank’s first cut in nearly a year.
The BoK has held its fire since July and adopted a wait-and-see approach as authorities continue assessing the evolution of the global economy and its impact on Korea, an increase in household debt and uncertainty related to the U.S. Federal Reserve’s upcoming monetary policy decision. In its statement, the monetary authority signaled that the U.S. economy continues displaying solid growth and that economic activity in China has stabilized, maintaining a moderate pace of growth. The Bank added that the improvements in the Eurozone seen in the past months have weakened. As a result, the Central Bank expects the global economy to continue growing, although at a moderate rate. The Bank recognizes that downside risks to the global outlook are the divergence in monetary policy in the world’s major central banks as well as uncertainties related to the UK decision to abandon the EU.
Regarding Korea’s economy, the Central Bank commented that domestic demand is showing signs of improvement and that this is positively affecting economic confidence among households and businesses. Regarding the labor market, it commented that employment continues to rise and the unemployment rate continues to fall. On the external front, the authority went on to recognize that the sector is gradually recovering and said that, “exports have increased slightly on the effects of transitory factors.” Going forward, the Bank expects the economy to continue growing, pushed by faster growth in domestic demand, owing chiefly by the government’s expansionary fiscal measures. On consumer-price developments, the Bank pointed out that that inflation remains low and continued to fall in August, owing mainly to seasonal factors and a temporary cut in electricity fees. However, the Bank expects inflation to remain low for the time being and gradually rise due to an expected slow increase in oil prices.
Due to an increase in foreign investors’ risk appetite, in the wake of ultra loose monetary policies in developed economies, global funds continued to invest in Korean financial markets, prompting an increase in net inflows of capital. This, as a result, had a positive impact on the exchange rate against the U.S. dollar and the Japanese yen and has caused long-term interest rate to drop. Due to these conditions at home, credit continues to grow, but the Central Bank has become increasingly concerned over the increase in household debt levels.
The Central Bank concluded that it will continue to closely monitor the increase in household debt and that further movements in the monetary policy rate will depend on the recovery of the economy, the evolution of inflation and financial stability.
Author: Ricardo Aceves, Senior Economist