Korea Monetary Policy August 2016

Korea

Korea: BoK stays put again in August and remains worried over household debt

August 11, 2016

Korea’s Central Bank held a policy meeting on 11 August in which it decided to maintain the base rate at a record low of 1.25%. The decision was in line with market expectations and followed a similar decision in July. The Bank of Korea (BoK) had surprisingly cut the interest rate by 25 basis points in June, in what it claimed was a preemptive move to cushion any negative impact from the restructuring of the country’s major shipping companies, which is likely to lead to job losses and a further dampening of consumer confidence.

The Central Bank has become increasingly concerned over the increase in household debt levels and the minutes of the July policy meeting showed that four of the six members of the Bank’s board had expressed concern about rising household debt. In past policy statements, the BOK often mentioned that it was monitoring household debt, but this typically followed references to the state and outlook of the global economy and global issues, such as the impact of the Brexit, the monetary policies of major central banks or capital flows. In August’s statement, however, the rise in household debt was the first topic the BOK mentioned in its list of issues that it is closely monitoring.

Regarding the overall state of Korean economy, the BoK said that exports remain on a contractionary trend, while domestic demand, in particular private consumption, is showing signs of healthy growth. Economic sentiment among businesses and consumers is also showing positive signs and the labor market is steadily strengthening. The Bank pointed out that economic growth in Korea will be supported by the government’s expansionary fiscal policy, but that economic uncertainties from abroad—namely the Chinese economic slowdown and the aftermath of Brexit—will weigh on the outlook.

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, financial stability and the progress of corporate restructuring.

Expectations for further BOK easing in the near future remain high, with some panelists projecting the Bank cutting the policy rate further this year to 1.00%. On average, FocusEconomics Consensus Forecast panelists expect the base rate to end 2016 at 1.11%. The reduction, if realized, would bring Korea’s monetary policy rate to what economists see as the lower limit for now. Meanwhile, panelists see the policy rate ending the year at 1.06% in 2017.


Author:, Senior Economist

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Korea Monetary Policy August 2016 1

Note: BoK Base Rate in %.
Source: Bank of Korea (BoK).


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