Korea: Korea's Central Bank announces surprising cut in June
June 9, 2016
At its 9 June Monetary Policy Board meeting, the Bank of Korea (BOK) announced its decision to cut the base rate by 25 basis points to 1.25%. The Bank’s move took the markets by surprise as the majority of analysts had expected no cut since the Bank had not provided hints of any policy action in previous meetings. The cut in the interest rate is the first following 11 consecutive meetings of unchanged policy.
In making the decision to cut interest rates, the Central Bank indicated that economic conditions both domestically and abroad will have an impact to the country’s growth outlook. Looking at the global economy, the Central Bank said that the U.S. economy is emerging from a temporary slowdown, economic activity in the Eurozone continues to grow, although at a soft pace, and that China remains trapped in a period of moderate growth. Consequently, the Central Bank signaled that it foresees that the global economy will maintain its recovery, although it will be weak and risks to the global outlook are tilted to the downside. Looking at the Korean economy, the Bank highlighted that the external sector remains depressed and that private consumption—the key engine of growth of the economy—is showing signs of weakness. Moreover, Korean monetary authorities stated that at the same time when confidence in economic agents, principally households and firms, remains subdued, employment levels remain stable. Regarding the evolution of consumer prices, the Bank assessed that the low inflation levels observed in the past months are here to stay. The Central Bank does not foresee inflationary pressures in the coming months, mainly due to still low oil prices.
Speaking about financial markets, monetary authorities pointed out that Korean stock prices have fluctuated on the heels of global stock market movements. Regarding the won, the BOK indicated that the Korean currency has experienced volatility against the U.S. dollar mainly in the wake of decisions and expectations regarding monetary policy making in the U.S. Regarding the yen, the Bank commented that the won has depreciated against the Japanese currency. Moreover, the Bank mentioned its concern regarding growing household debt, which has seen a substantial increase in recent years.
The Bank concluded its statement by signaling that, “the Board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation approaches the target level over a medium-horizon, while paying greater attention to financial stability.” However, in its final conclusion regarding future policy action, the Central Bank added that, while it will closely monitor monetary policies of other major central banks, it will also pay close attention to the possibility of a British exit from the EU.
Author: Ricardo Aceves, Senior Economist