The Bank of Korea (BOK), which has cut its rate by 50 basis points this year following cuts in March and June, maintained its view that the global economy will "sustain its modest recovery," but added that this could be affected by heightened volatility in financial markets due to the situation in Greece, changes in monetary policies by major countries and by weaker growth in emerging markets, such as China where it said the trend of slowing growth had continued.
The BOK also took note of a decline in Korean stock prices due to the situation in Greece and a depreciation of the won against both the U.S. dollar and Japanese yen while long-term market rates had risen in response to expectations of an increase in rates by the U.S. Federal Reserve and higher Korean bond issuance.
Consumption in South Korea has "declined significantly" and sentiment of economic agents has worsened due to the outbreak of the Middle East Respiratory Syndrome (MERS), but the BOK said it still expects the domestic economy to improve due to expansionary macroeconomic policies and a gradual decline of the shock from the MERS outbreak.
Last month Moody's Investors Service said MERS amounted to a credit negative for Korea as it had weakened consumer sentiment and threatened to undermine the incipient economic recovery. But the Korean government has announced a 11.8 trillion won extra budget to counter some of the dampening effects of the virus, a move that economists said would make a BOK rate cut less likely.
Korea's Gross Domestic Product expanded by an annual 2.5 percent in the first quarter of this year, down from 2.7 percent in the fourth quarter and the weakest rate since the first quarter of 2013.
The inflation rate rose to 0.7 percent in June from 0.5 percent due to higher agricultural, livestock and fish prices but the BOK said it expects inflation to continue at a low level due to low oil prices.
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 1.50% for the intermeeting period.
Based on currently available information the Committee considers that the trend of economic recovery in the US has grown evident again, and that the improvements in the euro area have continued as well. In emerging market countries including China the trends of slowing growth have continued. 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 the heightened international financial market volatility due to the situation in Greece, by changes in the monetary policies of major countries and by the weakening of economic growth in emerging market countries.
Looking at the Korean economy, amid continued sluggishness in exports the Committee notes that, under the influence of the Middle East Respiratory Syndrome (MERS) outbreak for example, consumption has declined significantly and the sentiments of economic agents have worsened. On the employment front, the unemployment rate has risen 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 grown. The Committee forecasts that the domestic economy will show a trend of recovery going forward, owing chiefly to the expansionary macroeconomic policies and to the subsiding of the shock from the MERS outbreak, but judges the uncertainties surrounding the growth path to be high.
Consumer price inflation rose from 0.5% the month before to 0.7% in June, due mainly to increases in prices of agricultural, livestock and fisheries products and to a narrowing of the extent of decline in petroleum product prices. Core inflation excluding agricultural and petroleum product prices fell slightly to 2.0%, from 2.1% in May. 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 continued in both Seoul and its surrounding areas and the rest of the country.
In the domestic financial markets, influenced mostly by the situation in Greece, stock prices have fallen and the Korean won has depreciated against both the US dollar and the Japanese yen. Long-term market interest rates have risen, in response mainly to expectations of a policy rate hike by the US Federal Reserve and of an increased volume of Korean Treasury bond issuance. Bank household lending has sustained a trend of increase at a level substantially exceeding that of recent years, led by mortgage loans.
Looking ahead, while working to sustain 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 the trend of increase in household debt and external risk factors such as the situation in Greece and shifts in major countries’ monetary policies, as well as the trends of capital flows."