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South Korea holds rate, to maintain easy policy stance

Thursday, January 12, 2017 19:42
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    South Korea’s central bank left its base rate at 1.25 percent for the seventh consecutive month and said it would maintain an easy monetary policy stance because inflationary pressures stemming from demand are unlikely to be high given moderate economic growth.
    The guidance by the Bank of Korea (BOK) of keeping the “stance of monetary accommodation” is new and was not in the monetary board’s statement from December last year.
    The BOK, which cut its rate by 25 basis points in June, said the economy had slowed “somewhat” despite an easing of the slump in exports and forecast growth in 2017 in the “mid-2% range.”
    South Korea’s economy grew by an annual rate of 2.6 percent in the third quarter of last year, down from 3.3 percent in the second quarter.
     Today’s statement by the BOK comes after the central bank last month told the parliament there was a chance that growth this year may slow from 2.8 percent expected for 2016 as consumption and construction investment was expected to slow while capital investment and exports were likely to rebound.
    “The trend of recovery in domestic demand activities is expected to be limited, due to deteriorations in economic sentiment for example, but exports will likely improve thanks chiefly to the global economic recovery,” the BOK said today.
    Headline inflation in South Korea has been stable at 1.3 percent from October to December while the won has bounced back in the last week after weakening in the last quarter of 2016.
    The won was trading at 1,175 to the U.S. dollar today, up 2.7 percent this year but unchanged since the start of 2016.
    The BOK expects inflation to gradually rise to near its 2.0 percent target by mid-2017 due to higher oil prices while core inflation will remain in the mid- to upper-1 percent range.

    The Bank of Korea issued the following statement:

“The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 1.25% for the intermeeting period.
Based on currently available information the Board considers that the trend of global economic recovery has expanded somewhat, led by the US and some emerging market economies. Global financial market volatility has diminished, as the trends of rising government bond rates in major countries have subsided and stock prices have risen. Looking ahead the Board judges that the global economic recovery will be affected by factors such as the directions of the new US government’s economic policies, the pace of monetary policy normalization by the US Federal Reserve, and the movements toward spreading trade protectionism.
In Korea, the slump in exports has eased but the Board judges the pace of domestic economic growth to have slowed somewhat, as the recovery in domestic demand activities has weakened. Employment conditions have been somewhat sluggish, with the number of persons employed having continued to decline in the manufacturing sector while its trend of increase in the service sector has slowed as well. The Board sees the domestic economy as likely to continue its trend of moderate growth going forward, and forecasts a rate of GDP growth for this year in the mid-2% range. The trend of recovery in domestic demand activities is expected to be limited, due to deteriorations in economic sentiment for example, but exports will likely improve thanks chiefly to the global economic recovery.
Consumer price inflation has risen to the mid-1% level, in line with the easing of downward price pressures on the supply side. Core inflation (excluding food & energy product prices from the CPI) has been in the mid- to upper-1% range, while the rate of inflation expected by the general public has remained at the mid-2% level. Looking ahead the Board forecasts that consumer price inflation will gradually rise to near the 2% target level by around the middle of 2017, on the effects mainly of the increases in international oil prices, and that core inflation will maintain a level in the mid- to upper-1% range.
In the domestic financial markets, the volatilities of both stock prices and long-term market interest rates have subsided somewhat as the global financial market has stabilized. The Korean won-US dollar exchange rate has continued its uptrend seen since October of last year, in line with the strengthening of the US dollar globally. The upward trends of housing sales prices have slowed, centering around Seoul and its surrounding areas. Household lending has continued its substantial increase, but the amount of increase in that by banks has shown signs of lessening recently.

Looking ahead, 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-term horizon, while paying attention to financial stability. As the inflationary pressures on the demand side are not expected to be high, given the moderate pace of domestic economic growth, the Board will maintain its stance of monetary policy accommodation. In this process it will closely monitor the uncertainties in domestic and external conditions and their effects, the progress of monetary policy normalization by the US Federal Reserve, and the trend of increase in household debt.”



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