The Bank of Korea's (BOK) view of downside risks in today's statement compares with its statement from last month in which it said the uncertainties surrounding the growth path had increased further.
The BOK, which cut its rate by 25 basis points in June, reiterated that it was closely monitoring the progress of monetary policy normalization by the U.S. Federal Reserve along with the trend of increase in household debt.
Commenting on South Korea's economy, the BOK said exports were on the rise while domestic demand was weak. Overall the central bank expects the economy to "sustain its trend of modest growth going forward, in line with a recovery of the global economy.
South Korea's economy grew by an annual rate of 2.6 percent in the third quarter of the year, down from 3.3 percent in the second quarter while inflation was steady at 1.3 percent in November from October.
Against the U.S. dollar the won fell after the Federal Reserve's rate hike earlier today and was trading at 1,179.4 to the dollar today, down 0.3 percent this year.
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 steady economic recovery in the US has been sustained and that the Chinese economy has maintained its moderate pace of growth. The euro area has also continued its improvements. The Board forecasts that the global economy will maintain its moderate recovery going forward, while being affected by factors such as the directions of the new government's economic policies and the pace of monetary policy normalization in 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 shifted to an increase but the improvements in domestic demand activities have been weak. On the employment front, the employment-to-population ratio in November was higher than that in November of last year, as the number of persons employed increased. The unemployment rate meanwhile maintained the same level as in November last year. The Board forecasts that the domestic economy will sustain its trend of modest growth going forward, in line with a recovery of the global economy, but judges that the downside risks to the future growth path have expanded a bit, owing chiefly to the high degrees of uncertainty in recent domestic and external conditions.
Consumer price inflation registered 1.3% in November, the same as in October despite the extent of decline in petroleum product prices having narrowed, as the pace of increase in prices of industrial products other than petroleum slowed. Core inflation excluding agricultural and petroleum product prices fell slightly to 1.4%, from 1.5% in October. In the housing market, sales and leasehold deposit prices have shown upward trends, centering around Seoul and its surrounding areas. Looking ahead the Board forecasts that consumer price inflation will gradually rise, due mainly to the effects of the increases in international oil prices.
In the domestic financial markets since November, influenced mainly by expectations concerning the new US government's economic policies and the monetary policy of the US Federal Reserve, long-term market interest rates and the Korean won-US dollar exchange rate have risen. The Korean won-Japanese yen exchange rate has meanwhile fallen, in line with the yen’s relative weakening. Stock prices have rebounded after having declined, owing in part to increases in global stock prices. The extent of growth in household lending has expanded, led by home 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 uncertainties in domestic and external conditions and their effects, the progress of monetary policy normalization by the US Federal Reserve, and the trend of increase in household debt."