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Korea Monetary Policy November 2019

Korea: BOK stands pat in November and lowers next year’s growth forecast

At its 28 November monetary policy meeting, the Bank of Korea (BOK) voted to keep the base rate unchanged at 1.25%, as had been widely expected by market analysts. The decision follows a rate cut at its previous meeting, tepid inflationary pressures and a subdued growth outlook for the Korean economy.

The Bank kept its accommodative monetary stance and noted muted price pressures and weaker global trade as the key reason to keep rates unchanged. Consumer prices year-on-year were flat in October and only ticked up by 0.2% in November. Consequently, inflation remained well below the Bank’s target rate of 2.0%. That being said, a notable hike in the minimum wage and an expected acceleration in economic activity should lift price pressures next year. Meanwhile, the domestic economy continues to struggle, as the export-dependent economy grapples with weaker global trade and a slowdown in demand for tech. Employment levels, however, recently edged higher, while housing prices also rose which should support household spending growth next year.

The Bank of Korea remained dovish in its communiqué, lowering both its inflation and economic growth outlook for next year. The BOK will try to restore inflation to its 2.0% target rate and support economic growth. Future developments with regards to the U.S.-China trade war and monetary policy stances taken by other major central banks next year will likely determine the future direction of interest rates. Particularly, a further deterioration in trade talks between the world’s two largest economies and monetary easing by key central banks could give the BOK reason to cut rates in 2020.

The BOK’s view is not universal, however, and some of our panelists see rates unchanged. Economists at Nomura, for instance, still view a rate cut in 2020 as unlikely, noting that they expect the Bank of Korea “to keep its policy rate on hold through 2020 as the bottoming out of the tech cycle should benefit Korea’s economy and because the BOK will likely try to balance growth and inflation concerns with financial stability risks and limited policy space.”

The next monetary policy meeting is set for 17 January next year.

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