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Korea Monetary Policy August 2019

Korea: BOK’s base rate on hold in August

At its 30 August monetary policy meeting, the Bank of Korea (BOK) voted to keep the base rate unchanged at 1.50%, as widely anticipated by market analysts. The decision followed a rate cut at the Bank’s previous meeting in July—the first in three years—amid a dim outlook for the Korean economy and muted inflationary pressures.

The Bank appeared to be in wait-and-see mode in August. On the one hand, global economic growth has continued to moderate and international trade is flagging, partly due to increased protectionism between the U.S. and China, which is weighing on domestic economic prospects. Furthermore, inflation has remained well below the BOK’s 2.0% target recently, mainly on lower oil and food prices. But, on the other hand, the BOK noted a weaker currency and stronger economic data since July’s rate cut, which were likely reasons for not cutting rates and continuing to assess incoming data in August.

In its communiqué, the BOK remained dovish overall, noting it would conduct monetary policy in a manner that will “ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level”. This suggests further monetary policy easing is likely before year end.

Nomura economists still expect the Bank to deliver a cut in Q4, noting: “The strong growth of industrial production in July, the recent currency depreciation and an acceleration of mortgage loan growth […] supported the BOK’s decision to stay on hold […] We expect the BOK to deliver one more 25bp cut this year, most likely at its next meeting.” The next monetary policy meeting is set for 17 October.

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