Korea: BoK maintains record-low rates for fourth month in October
October 13, 2016
At its 13 October monetary policy meeting, the Bank of Korea (BoK) announced that it will hold the base rate constant at a record low of 1.25%, which was largely in line with market expectations. This is the fourth month in which the Central Bank has kept the main monetary policy rate unchanged after having slashed it by 25 basis points in June, the Bank’s first cut in nearly a year.
The BoK prolonged its cautious wait-and-see approach faced with rising household debt and the increasing possibility of a Federal Reserve interest rate hike in December. In its statement, the Monetary Authority said that it continues to see global growth as moderate, fueled by a strong economic performance in the U.S. and, to a lesser extent, in China, but dragged down by lackluster improvements in the euro area. Looking forward, the BoK sees changes in major countries’ monetary policies, Brexit-related uncertainties and economic conditions in emerging market countries as the main downside risks to the global outlook.
Regarding the state of the Korean economy, the Central Bank noted that domestic demand activities showed further signs of improvement, largely stemming from strong investment in the construction sector. Household indebtedness continued to climb, showing an upward trend exceeding that of recent years, led by mortgage loans. Conversely, exports declined again in September. Going forward, the Bank expects the economy to continue growing due to gradually recovering trade flows and the positive effects of expansionary macroeconomic policies on the economy, though both internal and external uncertainties remain high. On inflation, the Bank pointed out that consumer prices in Korea rose notably in September due to higher prices for agricultural products. The Bank expects the effects of the temporary cut in electricity fees—which lasted from July to September—to dissipate and international oil prices to rebound. These developments, in turn, are likely to translate into higher prices for consumer goods and services in the country.
The Central Bank concluded that it will continue to pay close attention to the increase in household debt and that further movements in the monetary policy rate will depend on the recovery of the economy, financial stability and the evolution in consumer prices as these approach the Bank’s target level.
Author: Ricardo Aceves, Senior Economist