Wednesday, April 8, 2015

Korea maintains rate, says domestic demand improves

    South Korea's central bank maintained its base rate at 1.75 percent, as expected, and repeated its relatively neutral guidance from last month that it was closely monitoring external risks factors, such as international oil prices and shifts in major countries' monetary policies, along with the degree of spare capacity in the country's economy and trends in household debt and capital flows.
     The Bank of Korea (BOK), which surprised many economists by cutting its rate by 25 basis points last month, struck a slightly more optimistic tone about domestic demand, saying consumption and investment appear to have improved though exports have continued to decline.
     In March the BOK described private consumption and investment in new facilities as having "exhibited sluggish movements."
     The BOK also tweaked its description of the negative output gap, today saying that it will persist for a "considerable time," a marginally better description than in March when it said the negative output gap would continue for "longer than had been anticipated."
     In the fourth quarter of 2014 Korea's Gross Domestic Product expanded by 0.3 percent from the third quarter for annual growth of 2.7 percent, down from 3.2 percent in the third quarter and the weakest growth rate all year.
    In January the BOK cut its 2015 growth forecast to 3.4 percent from 3.9 percent forecast in November. The BOK is due to update its forecast today and is expected to cut the forecast further.
    Turning to inflation, the BOK seemed less pessimistic, saying it expects inflation to continue at a low level, mainly due to the impact of low oil prices. In March the BOK said inflation would continue at a level that was lower than originally expected.
    Korea's consumer price inflation rate dropped to 0.4 percent in March from 0.5 percent in February, mainly due to a fall in the prices of agriculture, livestock and fish products.
    In January the BOK cut its 2015 inflation forecast to 1.9 percent from 2.5 percent forecast in November. The central bank targets inflation of 2.5 to 3.5 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 1.75% for the intermeeting period.

Based on currently available information the Committee considers that, although the trend of economic recovery in the US has been sustained and improvements 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 judges that domestic demand activities such as consumption and investment appear to have improved, although exports have continued their trend of decline due mostly to decreases in the unit prices for example of petroleum products, while the sentiments of economic agents have not clearly recovered. On the employment front, the unemployment rate has risen somewhat, due mainly to an expansion in job search activities, but the employment-to-population ratio has also increased as the number of persons employed has steadily grown. The Committee expects that the domestic economy will show a modest trend of recovery going forward, although the negative output gap will persist for a considerable time.

Despite a narrowing of the extent of decline in petroleum product prices, consumer price inflation fell from 0.5% the month before to 0.4% in March, due mainly to decreases in prices of agricultural, livestock and fisheries products. Core inflation excluding agricultural and petroleum product prices fell to 2.1%, from 2.3% in February, owing to a slowdown in the rate of industrial product price increase. Looking ahead the Committee forecasts that inflation will continue at a low level, due mainly to the effects of the low oil prices. In the housing market, the upward trends of sales and leasehold deposit prices have accelerated in both Seoul and its surrounding areas and the rest of the country.

In the domestic financial markets, long-term market interest rates have fallen while stock prices have risen, due largely to the Base Rate cut, to the easing of concerns about an early policy rate hike by the US Federal Reserve, and to inflows of foreigners’ securities investment funds. The Korean won had depreciated against the US dollar but has since appreciated, affected by changes in expectations related to the monetary policy of the US Federal Reserve. After depreciating, the won has also appreciated against the Japanese yen. 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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