Wednesday, October 12, 2016

South Korea holds rate, uncertainty around growth high

    South Korea's central bank left its base rate steady at 1.25 percent but repeated its view from August that uncertainties surrounding its growth path remain high in light of domestic and global economic conditions.
    But the Bank of Korea (BOK), which cut its rate by 25 basis points in June, also confirmed that it still expects the country's economy to "sustain its trend of modest growth" due to a gradual recovery in global trade and the impact of expansionary economic policies.
    In August the International Monetary Fund (IMF) forecast that South Korea' economy would grow by 2.7 percent this year, supported by the government's 11 trillion won in additional spending and the BOK's easing.
    In July the BOK lowered its growth forecast for this year to 2.7 percent from 2.8 percent. In the second quarter of this year, South Korea's economy grew by an annual 3.3 percent, up from 2.8 percent in the first quarter.
    As in recent statements, the BOK noted that the country's exports had declined but domestic demand had continued to improve, mainly due to higher investment in construction.
    Inflation in South Korea jumped to a higher-than-expected 1.2 percent in September from 0.4 percent in August due to higher agricultural prices while core inflation, excluding agricultural and petroleum prices, rose to 1.3 percent from 1.1 percent.
   "Looking ahead the Board forecasts that consumer price inflation will gradually rise, due mainly to the disappearance of the effect of the temporary cut in electricity fees and to the rebound in international oil prices, " the BOK said.
    In July the BOK trimmed its 2016 inflation forecast to 1.1 percent from 1.2 percent, below its 2.0 percent target.

    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 Chinese economy has maintained its moderate pace of growth. However, the improvements in the euro area have remained weak. The Board forecasts that the global economy will maintain its recovery going forward, albeit at a moderate pace, while being affected by factors including changes in the monetary policies of major countries such as the US, the uncertainties related to Britain's exit from the European Union, and economic conditions in emerging market countries.
Looking at the Korean economy, exports have declined but domestic demand activities appear to have continued their improvements, driven mainly by investment in construction. On the employment front, the trend of increase in the number of persons employed slowed in September, while the unemployment rate rose compared to that in September of last year. The employment-to-population ratio was meanwhile slightly higher. The Board forecasts that the domestic economy will sustain its trend of modest growth going forward, owing chiefly to a gradual recovery in global trade and to the effects of expansionary macroeconomic policies. However, in view of economic conditions domestically and abroad, it judges the uncertainties surrounding the growth path to be high.
Consumer price inflation rose from 0.4% the month before to 1.2% in September, owing chiefly to increases in agricultural product prices. Core inflation excluding agricultural and petroleum product prices also rose to 1.3%, from 1.1% in August. In the housing market, the upward trends of sales and leasehold deposit prices have continued, centering around the Seoul area. Looking ahead the Board forecasts that consumer price inflation will gradually rise, due mainly to the disappearance of the effect of the temporary cut in electricity fees and to the rebound in international oil prices.
In the domestic financial markets since September, long-term market interest rates and the Korean won-US dollar and Korean won-Japanese yen exchange rates have risen, in line mainly with strengthened expectations of a policy rate hike by the US Federal Reserve. Stock prices have rebounded after having declined, owing in part to the rise in international oil prices. 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, any changes in the monetary policies of major countries, and the progress of corporate restructuring."


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