Korea Monetary Policy May 2016

Korea

Korea: Korea's Central Bank stays put in May and delivers no hints regarding action in near-term

May 13, 2016

On 13 May, members of the board of the Bank of Korea (BoK) decided unanimously to leave the base rate unchanged at 1.50%. The decision to maintain the base rate was widely expected and represented the 11th consecutive time in which the Central Bank has refrained from modifying the main monetary policy rate.

This month, there were a few changes the governor’s comments in the official statement. According to Governor Lee Ju-yeol, the Central Bank maintains its view that the global economy continues showing signs of moderation due to a slower-than-expected recovery in developed economies, while emerging economies continue to experience weak growth. This month, however, the Central Bank recognized that the slowdown in the Chinese economy is easing, while other emerging economies, namely Russia and Brazil, continue to deteriorate.

Regarding the domestic economy, the BoK commented on the persistent downward trend in the country’s exporting sector, while activity related to domestic demand, particularly private consumption, as well as confidence indicators continued to improve modestly. On a negative note, the Bank recognized that the labor market remains weak and the level of unemployed remains high. The Bank’s assessment of the economy’s short-term outlook stated that that economic growth will be modest in the coming months at best and will be supported mainly by domestic demand. The external sector will continue to struggle against a backdrop of subdued global demand.

The BoK decided to leave its main monetary policy rate unchanged in May due to a lack of inflationary pressures. The Bank stated that inflation in April remained at the low-reading level seen in March. In comments on its future policy direction, the Central Bank included potential headwinds from restructuring on its lists of risks to watch. In a press conference after the announcement of the decision, Governor Lee Ju-yeol repeated an earlier comment that Korea’s monetary policy remains accommodative and that data have been well aligned with the BoK’s April official outlook report. This combination suggests that the BoK’s policy will be data-dependent, with no additional rate action unless growth conditions disappoint.

FocusEconomics Consensus Forecast panelists expect the base rate to end 2016 at 1.29%. In 2017, panelists see the policy rate ending the year at 1.36%.


Author: Teresa Kersting, Economist

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Korea Monetary Policy May 2016

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


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