Wednesday, December 10, 2014

Korea holds rate, consumption, investment inadequate

    South Korea's central bank maintained its base rate at 2.0 percent, as widely expected, but struck a largely negative note about economic prospects by saying the recovery of consumption and investment in new facilities had been inadequate and economic sentiment remained weak despite a favorable pattern in exports.
    The Bank of Korea (BOK), which has cut its rate twice this year, most recently in October, by a total of 50 basis points, repeated its recent assessment that it still expects the economy's negative output gap to gradually narrow, albeit at a moderate pace.
    The BOK also repeated that inflation was expected to remain low "for a considerable time"
 due to the fall in international oil prices but it still expects inflation to gradually rise.
    South Korea's headline inflation rate eased to 1.0 percent in November from 1.2 percent while Gross Domestic Product expanded by 0.9 percent in the third quarter from the second quarter for annual growth of 3.2 percent, down from 3.5 percent, and the lowest growth rate in five quarters.

    The Bank of Korea issued the following statement:

"The Monetary Policy Committee of the Bank of Korea decided today to leave the Base Rate unchanged at 2.00% for the intermeeting period.
Based on currently available information the Committee considers that, although the trend of economic recovery in the US has become more evident, the sluggishness of economic activities in the euro area has continued while trends of economic growth in emerging market countries have differed from country to country. The Committee forecasts that the global economy will sustain its modest recovery going forward, centering around the US, but judges that the possibility exists of its being affected by changes in the monetary policies of major countries, by the prolongation of economic sluggishness in the euro area, by the weakening of economic growth in some emerging market countries, and by geopolitical risks.

In Korea, while exports have maintained generally favorable movements the Committee judges that the recoveries of consumption and facilities investment have been inadequate and that the sentiments of economic agents remain weak. On the employment front, the number of persons employed has expanded steadily, led by increases in the 50-and-above age group and in the service sector. The Committee expects that the negative output gap in the domestic economy will gradually narrow going forward, albeit at a moderate pace.

Consumer price inflation fell from 1.2% the month before to 1.0% in November, due mainly to declines in petroleum product prices and to slowdowns in the rates of industrial product price increase. Core inflation excluding agricultural and petroleum product prices fell to 1.6%, from 1.8% in October. Looking ahead, the Committee forecasts that inflation will gradually rise, after remaining at a low level for a considerable time influenced for example by declines in international oil prices. 
In the housing market the uptrend of sales prices has slowed, centering around Seoul and its surrounding areas, while leasehold deposit prices have continued to rise at a pace similar to that in October.
In the domestic financial markets, the Korean won has continued its depreciation against the US dollar and its appreciation against the Japanese yen, in line with the strength of the dollar globally and the weakness of the yen. Stock prices, after having fluctuated within a relatively narrow range, have fallen to a considerable extent. Long- term market interest rates had shown a decline, in reflection mainly of expectations related to the monetary policies of major countries, but have rebounded.
Looking ahead, while supporting the recovery of economic growth, the Committee 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 shifts in major countries’ monetary policies, as well as the trends of household debt and of capital flows."


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