Monday, February 16, 2015

South Korea maintains rate, sees persistent output gap

    South Korea's central bank maintained its base rate at 2.0 percent, as expected, and repeated that it expects the country's economy to recover modestly but that the negative output gap will persist for a considerable time.
    The Bank of Korea (BOK), which cut its rate by 50 basis points in 2014, also repeated its statement from January that exports had declined but added today that this decline was mainly due to lower prices for petroleum products, a more nuanced view.
    The BOK confirmed its view that inflation should gradually rise from the second half of this year.
    Korea's headline inflation rate was steady at 0.8 percent in January from December as lower prices for petroleum products was countered by higher prices for other industrial products.
    Excluding agriculture and petroleum product prices, core inflation rose jumped to 2.4 percent in January from 1.6 percent.
    Last month the BOK cut its forecast for 2015 inflation to 1.9 percent from a previous forecast of 2.4 percent while the forecast for Gross Domestic Product this year was cut to 3.4 percent from 3.9 percent.

    The Bank of Korea issued the following statement:

"The Monetary Policy Committee of the Bank of Korea decided today to leave the Base Rate unchanged at 2.00% for the intermeeting period.

Based on currently available information the Committee considers that, although the trend of a solid economic recovery in the US has been sustained and the euro area has also shown signs of improvement, albeit weak, economic growth in emerging market countries including China has slowed. The Committee forecasts that the global economy will sustain its modest recovery going forward, centering around major advanced economies such as the US, but judges that the possibility exists of its being affected by changes in the monetary policies of major countries, by the weakening of economic growth in emerging market countries, by geopolitical risks, and by the uncertainties over the restructuring of Greek debt.

Looking at the Korean economy, while exports have decreased, due mainly to declines in the unit prices for example of petroleum products, the Committee judges that the recovery of domestic demand has not been strong and that the sentiments of economic agents remain weak. On the employment front, the number of persons employed has expanded steadily, led by increases in the 50-and-above age group and in the service sector. The Committee expects that the domestic economy will show a modest trend of recovery going forward, but that the negative output gap will persist for a considerable time.

Despite increases in the extents of decline in petroleum product prices, consumer price inflation registered 0.8% in January, the same as in December, due mainly to an expansion in the scale of increase in prices of industrial products other than petroleum. Core inflation excluding agricultural and petroleum product prices rose sharply from 1.6% the month before to 2.4% in January. Looking ahead, the Committee forecasts that inflation will gradually rise from the second half of this year, after remaining at a low level. In the housing market, the upward trends of sales prices slowed somewhat, while leasehold deposit prices continued their uptrend centering around Seoul and its surrounding areas.

In the domestic financial markets, long-term market interest rates, after having fallen in line mainly with monetary policy easing by major countries, have rebounded in response to the improvements in US economic indicators. Stock prices have risen. The Korean won, which had appreciated against the US dollar, has depreciated as the effects of the sustained current account surplus and the dollar’s strength globally have intersected. The recent trend of won appreciation against the Japanese yen has meanwhile weakened amid increased demand for safe-haven assets. Bank household lending has sustained its trend of increase at a level greatly exceeding that of recent years, led by mortgage loans

Looking ahead, while supporting the recovery of economic growth the Committee will conduct monetary policy so as to maintain price stability over a medium-term horizon and pay attention to financial stability. In this process it will closely monitor external risk factors such as international oil prices and shifts in major countries’ monetary policies, as well as developments related to the spare capacity in the domestic economy and the trends of household debt and capital flows."


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