Monday, February 15, 2016

South Korea holds rate, improvement in economy falters

    South Korea's central bank left its base rate steady at 1.50 percent, as widely expected, but said the "trend of improvement in the Korean economy is faltering, amid a weakening of the recovery in domestic demand while the sluggishness of exports worsens."
    But the Bank of Korea (BOK), which cut its rate by 50 basis points last year, repeated its view from last month that the domestic economy will continue to recover though uncertainties surrounding the growth path have increased.
    The BOK also repeated that it is closely monitoring external risks, including changes in the monetary policies of major countries, the financial and economic conditions in China, movements in capital flows, geopolitical risks and the rise in household debt.
    In January the BOK lowered its 2016 growth forecast to 3.0 percent from October's forecast of 3.2 percent but at that point the central bank governor said the cut in the forecast did not warrant an easing of monetary policy.
    South Korea's economy grew by an annual rate of 3.0 percent in the fourth quarter of 2015, up from 2.7 percent in the third quarter and the BOK estimated full year growth of 2.6 percent.
    Consumer price inflation in South Korea eased to 0.8 percent in January from 1.3 percent in December as the impact of higher cigarette prices dropped out of the comparison. Core inflation, which excludes agricultural and petroleum products, fell to 1.7 percent from 2.4 percent.
    The BOK forecasts 2016 inflation of 1.4 percent, down from its previous forecast of 1.7 percent, and below its target of 2.0 percent.

    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 trends of economic recovery in the US and the euro area have weakened somewhat. 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 it will be affected by factors such as financial and economic conditions in China and other emerging market countries, international oil price movements, and global financial market volatility.

Looking at the Korean economy, the trend of decline in exports has expanded and the recovery of domestic demand activities such as consumption has also shown signs of weakening somewhat, while the sentiments of economic agents have been sluggish. On the employment front, as the trend of increase in the number of persons employed expanded in December, the employment-to-population ratio rose compared to that in December the year before while the unemployment rate fell. The Board forecasts that the domestic economy will continue its recovery going forward, centering around domestic demand activities, but in view of external economic conditions judges the uncertainties surrounding the growth path to have increased.

Consumer price inflation fell from 1.3% the month before to 0.8% in January, owing chiefly to the disappearance of the effect of the cigarette price hike, and core inflation excluding agricultural and petroleum product prices also fell to 1.7%, from 2.4% in December. Looking ahead the Board forecasts that consumer price inflation will continue at a low level, due mainly to the declines in international oil prices. In the housing market, the upward trends of sales and leasehold deposit prices slowed in both Seoul and its surrounding areas and the rest of the country.

In the domestic financial markets, influenced by global stock market unrest and by foreigners’ continuing net sales of domestic securities, stock prices have fallen and the Korean won has depreciated against the US dollar. The won has depreciated even more against the Japanese yen than the US dollar, on the strengthening of the yen due to investor preference for safe assets. Long-term market interest rates have fallen, in response mainly to declines in interest rates in major countries and to the movements of domestic economic and price indicators. 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 external risk factors such as any changes in the monetary policies of major countries or in financial and economic conditions in China, the movements of capital flows, geopolitical risks, and the trend of increase in household debt."


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