Wednesday, February 12, 2014

South Korea holds rate, recovery continues, inflation low

    South Korea's central bank maintained its base rate at 2.50 percent, as expected, saying the economic recovery is continuing and inflation will remain low for the being, due to stable international commodity prices, but eventually rise.
    The Bank of Korea (BOK), which cut its rate by 25 basis points in 2013, also said it expects the global economy to sustain its "modest" recovery going forward but it could be affected by changes in global financial market conditions from the U.S. Federal Reserve's tapering of quantitative easing and weaker growth in some emerging markets.
    Some of the indicators related to domestic demand in Korea have recently slumped, the BOK said, but exports continue to rise, sustaining the overall economic expansion.
    Korea's Gross Domestic Product expanded by an annual 3.9 percent in the fourth quarter of last year, up from 3.3 percent in the third quarter, for average 2013 growth of 2.8 percent, up from 2.0 percent in 2012, and the strongest growth in two years.
    "The Committee expects that the domestic economy will maintain a negative output gap for the time being going forward, although it forecasts that the gap will gradually narrow," the BOK said.

    Last month the BOK forecast that Korea's economy would expand by 3.8 percent in 2014 and then accelerate to 4.0 percent in 2015.
    Korea's inflation rate averaged 1.3 percent in 2013, far below the BOK's target range of 2.5-3.5 percent, but in its latest forecast the bank expects inflation this year to rise to 2.3 percent and then to 2.8 percent in 2015.
    In the first half  of this year inflation is expected to remain below the bank's target range but then rise in the second half.
    In January, Korea's headline inflation rate was steady at 1.1 percent from December.
    The BOK said Korean stock prices had recently rebounded and the won appreciated, reversing a depreciation of the won and lower stock prices due to the instability of international financial markets and outflows of foreigners' stock investment funds.
    Against the U.S. dollar, the won depreciated in the first half of 2013 before rebounding in the second half to end the year only 0.7 percent firmer. Since the start of the year, the won has eased 0.6 percent, trading at 1062.4 to the dollar today.
    Against the Japanese yen, the won has been rising since October 2011 when it hit a low of 15.6 and declined to 10 to the yen around the end of 2013, a rise of almost 36 percent. Since the start of this year, the won has eased slightly but was still trading at 10.36 today.
    Last month the governor of the BOK, Kim Choongsoo said the rapid depreciation of the yen against the won over the last year has hurt the South Korean industries that compete directly with Japan - such as steel, autos, machinery and electrical appliances - and any further depreciation of the yen would cause widespread pain to South Korea's exporters.
     However, he also ruled out a competitive devaluation of the won.


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