Korea: BoK maintains wait-and-see stance in light of increased uncertainty
November 11, 2016
At its 11 November monetary policy meeting, Korea’s Central Bank decided to leave the base rate unchanged at a record low of 1.25%, a decision that markets had expected. The Bank has kept the main monetary policy rate unchanged for five straight months after having slashed it by 25 basis points in June, which was the Bank’s first cut in nearly a year.
The BoK maintained its cautious wait-and-see approach as Korean monetary officials judged that that in light of recent developments, both at home and abroad, uncertainties surrounding growth in Korea have increased substantially. Regarding global developments, the Bank emphasized that the recovery in the U.S. economy remains on track, the Chinese economy is showing signs of stabilization, while growth in the Eurozone remains tepid. Looking at the domestic economy, the Bank stated that the external sector continued to deteriorate at the outset of the fourth quarter and the improvement seen in domestic demand in the past months has shown signs of cooling.
Although the Bank of Korea expects economic activity to sustain a modest growth trend—in line with the recovery of the global economy—going forward, such uncertainties represent a downside risk to the outlook. Meanwhile, a shock win by Donald Trump in the U.S. presidential elections on 8 November, a political scandal involving President Park Geun-hye and rising expectations of an interest rate hike by the U.S. Federal Reserve in December have caused the exchange rate of the Korean won relative to the U.S. dollar to weaken and the stock market to fall. The exchange rate of the won against the Japanese yen fell only slightly.
Bank of Korea’s Governor Lee Ju-yeol left the door open to possible further easing, saying the Central Bank still has room for maneuver, although the current monetary policy stance is quite accommodative. In a press conference after the interest rate decision, Governor Lee Ju-yeol received several questions regarding the potential economic impact of the U.S. election result and he commented that it was too early to determine whether or when President-elect Trump’s pledges will evolve into actual policy.
Some analysts believe that the Central Bank will further ease its stance going forward. Following November’s decision, James Lee, Economist at HSBC commented:
“We believe the BoK is likely to ease further in 2017. The central bank is forecasting real GDP growth at 2.8% in 2017, an estimate in which we see considerable downside risk. With the National Assembly split and occupied with other matters, fiscal policy will be of little help next year. As such, policy to support growth will again turn to BoK.”
Author: Ricardo Aceves, Senior Economist