Korea: Korea's Central Bank stays put in July after surprise cut in June
July 14, 2016
The Bank of Korea (BoK) decided to leave the base rate unchanged at a record low of 1.25% at its 14 July meeting. The Bank’s decision was in line with market expectations and followed a surprise 25-basis-point rate cut in June. The BoK surprised the markets in June by cutting the interest rate by 25 basis points in what it had 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 Bank commented that, with the available information, it considered that the global economy will maintain a weak growth trend going forward as growth in the U.S. economy remains solid, but the recovery in the Eurozone economy remains weak and Chinese economic growth has maintained a moderate growth pace. In addition, the Bank recognized that the global economy could be affected by rising uncertainties related to the UK’s vote to abandon the EU, alterations in global monetary policy in major economies, and financial and economic conditions in emerging economies. Monetary authorities commented that the immediate impact of Brexit on the Korean economy was felt temporarily in financial markets. Korean stock prices and the exchange rate of the won against the U.S. dollar and the Japanese yen fluctuated temporarily primarily due to the Brexit decision.
Regarding the Korean economy, the Central Bank stated that, “while the sentiments of economic agents have been sluggish, the trend of decline in exports has continued but domestic demand activities including consumption appear to be improving.” Korea's unemployment rate dropped slightly to 3.6% in June from 3.7% in May, continuing the decline from a high of 4.1% in February. That said, the Central Bank trimmed its economic growth forecast this year to 2.7% from 2.8% and cut its inflation projection to 1.1% from 1.2%. However, the downward revisions were less significant than expected as BoK Governor Lee Ju Yeol likely considered the government announced fiscal stimulus plan. Young Sun Kwon, Senior Economist MD at Nomura, comments:
“Compared to our forecasts (2016 GDP growth: 2.2%; CPI inflation: 0.8%), the BOK’s revisions to its economic outlook look optimistic to us. The governor mentioned today that the 25bp rate cut in June and the KRW10trn FY16 extra budget is estimated to support GDP growth by 0.2pp. However, we believe that weaker international trade volumes, falling domestic business investment and a cooling housing market will more than offset the policy response, in our view.”
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 effects of Britain's decision to leave the EU, the changes in the monetary policy stance of major countries and corporate restructuring at home.
Author: Ricardo Aceves, Senior Economist