Wednesday, March 11, 2015

Korea cuts rate 25 bps, growth, inflation below forecasts

    South Korea's central bank cut its base rate by 25 basis points to 1.75 percent, a surprise to most economists, saying economic growth and inflation will be below its expectations and the negative output gap will continue for longer than anticipated.
    The Bank of Korea (BOK), which cut its rate by 50 basis points in 2014, was clearly more downbeat about economic growth prospects than in January, saying exports had decreased, domestic demand was sluggish and the mood among economic agents had clearly not recovered.
    On Jan. 14 the BOK appeared to lay the groundwork for today's rate cut by downgrading its view of exports and the output gap. Nevertheless, most economists had expected the BOK to wait with any rate cut until next month when it updates its economic forecast.
    In January the BOK cut its 2015 growth forecast to 3.4 percent from 3.9 percent. In the fourth quarter of 2014 Korea's Gross Domestic Product expanded by 0.4 percent from the third quarter for annual growth of 2.7 percent, down from 3.2 percent in the third quarter.
    While the BOK repeated its view that the global economy would "sustain its modest recovery," it noted that growth in emerging markets, including China, had slowed. In January the BOK said that growth in China had "slowed somewhat."
    Korea's headline inflation rate fell further to 0.5 percent in February from January's 0.8 percent and the BOK forecast that "due mainly to the effects of low oil prices, inflation will continue at a level lower than originally expected."
    In January the BOK cut its 2015 inflation forecast to 1.9 percent from 2.5 percent forecast in November 2014. The BOK targets inflation of 2.5 percent to 3.5 percent.

    The Bank of Korea issued the following statement:

"The Monetary Policy Committee of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 2.00% to 1.75%.

Based on currently available information the Committee considers that, although the trend of a solid economic recovery in the US has been sustained and improvements, albeit modest, have also continued in the euro area, 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 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, and by geopolitical risks.

Looking at the Korean economy, the Committee notes that exports have decreased, due mostly to declines in the unit prices for example of petroleum products, that domestic demand activities such as private consumption and facilities investment have exhibited sluggish movements, and that the sentiments of economic agents have also not clearly recovered. 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, although falling short of the originally forecast growth path. The period of continuation of the negative output gap will as a result also be longer than had been anticipated.

Consumer price inflation fell from 0.8% the month before to 0.5% in February, owing mainly to increases in the extents of decline in petroleum product prices and to the slower paces of increase in prices of industrial products other than petroleum. Core inflation excluding agricultural and petroleum product prices fell slightly to 2.3%, from 2.4% in January. Looking ahead, the Committee forecasts that, due mainly to the effects of the low oil prices, inflation will continue at a level lower than originally expected. In the housing market, the upward trends of sales prices accelerated slightly, while leasehold deposit prices continued their uptrend centering around Seoul and its surrounding areas.

In the domestic financial markets, after having risen on foreigners net buying of domestic stocks for example, stock prices have recently fallen under the influence mostly of declines in stock prices in major countries. The Korean won has depreciated against the US dollar, affected by the dollars strength globally and by the synchronization between movements of the won and the Japanese yen following the yens weakening, while it has fluctuated within a certain range against the yen. Long-term market interest rates had risen, but have since declined. 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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