Thursday, May 12, 2016

South Korea maintains rate amidst uncertainties

    South Korea's central bank left its base rate unchanged at 1.50 percent, as expected, reiterating that uncertainties surrounding the country's growth path remain high in light of global economic conditions but the domestic economy should still continue to improve modestly.
    The Bank of Korea (BOK), which cut its rate by 50 basis points in 2015, also confirmed that it expects inflation to continue at a low level due to low oil prices while sales prices in the housing market had remained stable while leasehold deposit prices showed low rates of increase.
    The BOK added that it was closely monitoring changes in the monetary and economic conditions of major countries, progress in corporate restructuring, the trend in household debt and capital flows.
    South Korea's inflation rate was steady at 1.0 percent in April and March, below the central bank's 2.0 percent target.
    The country's economy expanded by an annual rate of 2.7 percent in the first quarter, down from 3.1 percent in the fourth quarter, but the BOK noted that exports were still trending downward while domestic consumption had continued to improve modestly.
    Last month the central bank said in its biannual report that it planned to keep its monetary policy accommodative for a while and lowered its growth forecast for this year to 2.8 percent from January's forecast of 3.0 percent.
    In 2017 the economy is seen expanding 3.0 percent compared with 2015's growth of 2.6 percent.
    The forecast for inflation in 2016 was lowered to 1.2 percent from 1.4 percent compared with 0.7 percent in 2015. For 2017 inflation is seen rising to 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 trend of economic recovery in the US has shown indications of slowing, but that the modest improvements in the euro area have continued. The economic slowdown in China has shown signs of easing a bit, but economic growth in other emerging market economies has continued to slow, centering around natural resource-exporting countries. 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 including financial and economic conditions in emerging market countries, international oil price movements, and global financial market volatility.

Looking at the Korean economy, exports have remained on their trend of decline, and domestic demand activities such as consumption, and the sentiments of economic agents have continued their modest improvements. On the employment front, while the pace of increase in the number of persons employed slowed somewhat in April, the employment-to-population ratio and the unemployment rate maintained the same levels as in April of last year. The Board forecasts that the domestic economy will continue its trend of modest improvement going forward, centering around domestic demand activities, but in view of external economic conditions judges the uncertainties surrounding the growth path to still be high.

Despite expansions in the extents of increase in prices of industrial products other than petroleum, consumer price inflation registered 1.0% in April, the same as in March, in line mainly with a slowdown in the rate of service fee increase. Core inflation excluding agricultural and petroleum product prices rose slightly to 1.8%, from 1.7% in March. Looking ahead the Board forecasts that consumer price inflation will continue at a low level, under the influence of the low oil prices for example. In the housing market, sales prices maintained their level of the previous month while leasehold deposit prices showed low rates of increase.

In the domestic financial markets, stock prices and long-term market interest rates have fallen since April after having previously risen, affected mainly by changes in investor preferences for safe assets. After having appreciated against the US dollar, the Korean won has depreciated against it again. The won has meanwhile depreciated considerably against the Japanese yen, in line with the yens strengthening. Bank household lending has sustained a trend of increase at a level exceeding that of recent years, led by mortgage loans.

Looking ahead, while working to support the recovery of economic growth the Board will conduct monetary policy so as to maintain price stability over a medium-term horizon, and also pay attention to financial stability. In this process it will closely monitor any changes in monetary policies or in financial and economic conditions in major countries, the progress of corporate restructuring, the trend of increase in household debt, and the movements of capital flows."


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