But the Bank of Korea (BOK), which has cut its rate twice this year by a total of 50 basis points, said it still expects the domestic economy to gradually improve, mainly due to the impact of expansionary economic policies.
But it underlined the uncertainties it faces from slowing growth in China and instability in financial markets in emerging economies related to the normalization of U.S. monetary policy.
In July the BOK cut its 2015 growth forecast to 2.8 percent from 3.1 percent forecast in April due to the impact of severe drought and the dampening effect on the MERS virus on consumption.
In the second quarter of this year Korea's Gross Domestic Product expanded by only 0.3 percent from the first quarter for year-on-year growth of 2.2 percent, down from 2.5 percent in the first quarter.
Despite lower petroleum prices, Korea's inflation rate was steady at 0.7 percent in July for the third consecutive month and the central bank expects inflation to remain at a low level due to the impact of low oil prices.
The Bank of Korea issued the following statement:
"The Monetary Policy Board 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 Board considers that the trend of economic recovery
in the US has been sustained, and that the improvements in the euro area have
continued as well. Economic growth in emerging market countries including China
has meanwhile continued to slow. The
Board forecasts that the global economy will maintain its recovery going forward,
albeit at a moderate pace, centering around advanced economies such as the US,
but judges that the possibility exists of its being affected by heightened
international financial market volatility, due to the instabilities in the
Chinese financial and foreign exchange markets and to a shift in the US Federal
Reserve’s monetary policy, and by the weakening of economic growth in emerging
market countries.
Looking at the Korean
economy, although the recovery in domestic demand activities such as consumption
and investment has continued, the trend of declining exports has persisted while
the improvement in economic agents’ sentiments has been inadequate. On the employment front, as the trend of increase in the
number of persons employed slowed in August, owing mainly to a base effect, the
employment-to-population ratio decreased while the unemployment rate rose
compared to those in August of last year. The Board forecasts that the domestic
economy will show a trend of recovery going forward, but in view of external
economic conditions judges the uncertainties surrounding the growth path to
have increased.
Despite declines in
petroleum product prices, consumer price inflation registered 0.7% in August,
the same as in July, in line mainly with expansions in the extents of increase
in prices of other industrial products. Core inflation excluding agricultural
and petroleum product prices rose slightly to 2.1%, from 2.0% in July. Looking ahead the Board 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, stock prices have fallen and the Korean won has depreciated
against both the US dollar and the Japanese yen, as securities investment funds
of foreigners have flowed out due to factors such as the instabilities in the
Chinese financial and foreign exchange markets. Long-term
market interest rates have fallen, influenced mainly by investor preference for
safe assets. 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 Board 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 any shift in the US Federal Reserve’s monetary policy and the financial
instabilities in emerging market countries including China, as well as the
trends of capital flows."
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