Wednesday, July 13, 2016

South Korea holds rate, sees improving consumption

    South Korea's central bank left its base rate steady at 1.25 percent but sounded more upbeat about domestic demand by saying consumption appeared to be improving in contrast to its view from last month when it said consumption had weakened.
    The Bank of Korea (BOK) surprised financial markets in June by cutting its rate by 25 basis points in what it described as a preemptive move to weather any negative impact from corporate restructuring. Last year the BOK cut its rate twice for total cuts of 50 basis points.
    The BOK added that it was closely monitoring the increase in household debt, the effects of Britain's decision to leave the European Union (EU), the changes in the monetary policy stance of major countries and corporate restructuring.
    Despite signs of improving consumption, along with a fall unemployment, the BOK said the sentiment of economic agents remained sluggish and the trend of decline in exports had continued.
    Korea's unemployment rate dropped slightly to 3.6 percent in June from 3.7 percent in May, continuing the decline from 4.1 percent in February.
    "The Board forecasts that the domestic economy will sustain its trend of modest growth going forward," the BOK said, adding this was mainly due to the expansionary government policy.
    In contrast to June, when the BOK said the downside risks to growth had "expanded", the BOK said today that uncertainties surrounding the growth path were "high" due to international and domestic conditions.
    In its Economic Outlook from April, the BOK forecast 2016 average growth of 2.8 percent, up from 2015's 2.6 percent, and 3.0 percent for 2017. Exports were seen rising 0.8 percent this year, up from 0.5 percent last year, and then by 2.7 percent in 2017.
   Korea's economy expanded by an annual rate of 2.8 percent in the first quarter of this year, down from 3.1 percent in the fourth quarter of last year.
    South Korea's inflation rate was steady at 0.8 percent in June but the BOK appeared to upgrade its view of inflation, saying it will gradually rise as the effects of low oil prices diminish. Last month the BOK said inflation will continue at a low level under the influence 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 1.25% 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, although weak, have continued. The Chinese economy has meanwhile maintained its moderate growth. The Board forecasts that, while the global economy will maintain its weak recovery going forward, it will be affected by factors including uncertainties related to Britains exit from the European Union, changes in the monetary policies of major countries, and financial and economic conditions in emerging market countries.

Looking at the Korean economy, while the sentiments of economic agents have been sluggish, the trend of decline in exports has continued but domestic demand activities including consumption appear to be improving. On the employment front, as the number of persons employed has increased, the employment-to-population ratio rose and the unemployment rate fell in June compared to those in June of last year. The Board forecasts that the domestic economy will sustain its trend of modest growth going forward, owing chiefly to expansionary macroeconomic policies, but in view of economic conditions domestically and abroad judges the uncertainties surrounding the growth path to be high.

Consumer price inflation registered 0.8% in June, the same as in May, in line mainly with declines in agricultural product prices. Core inflation excluding agricultural and petroleum product prices rose slightly to 1.7%, from 1.6% in May. In the housing market, sales and leasehold deposit prices showed low rates of increase. Looking ahead the Board forecasts that consumer price inflation will remain at a low level for the time being, and then gradually rise as the effects of the low oil prices diminish.

In the domestic financial markets, stock prices and the Korean won-US dollar and Korean won-Japanese yen exchange rates fluctuated temporarily to large extents after the Brexit decision. Long-term market interest rates have fallen considerably, owing largely to declines in government bond rates in major countries. Household lending has sustained a trend of substantial increase at a level exceeding that of recent years, led by mortgage loans.

Looking ahead, the Board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation approaches the target level over a medium-term horizon, while paying attention to financial stability. In this process it will closely monitor the trend of increase in household debt, the effects of the Brexit, any changes in the monetary policies of major countries, and the progress of corporate restructuring."


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