Thursday, December 10, 2015

Korea holds rate, high uncertainty around growth path

    South Korea's central bank maintained its base rate at 1.50 percent, as expected, and confirmed its recent view that it is keeping a close eye on U.S. monetary policy, economic conditions in emerging market economies, including China, changes in capital flows and rising household debt.
    The Bank of Korea (BOK), which has cut its rate twice this year by a total of 50 basis points, also repeated the view expressed in recent months that the domestic economy will continue its recovery based on domestic demand but uncertainties surrounding this growth path are high due to the external conditions that are leading to a persistent trend of declining exports.
    Consumption in Korea rose strongly in October due to government stimulus but exports remained sluggish in November, the BOK said in its latest economic development paper, due to slowing global trade and weaker growth in emerging market economies.
    Korea's Gross Domestic Product expanded by 1.3 percent in the third quarter of this year from the second quarter for annual growth of 2.7 percent, up from 2.2 percent.
    The BOK forecasts 2.7 percent growth for 2015, down from 3.3 percent last year, and 3.2 percent growth in 2016.
    The BOK said consumer price inflation rose to 1.0 percent in November from 0.9 percent the previous months mainly due to a lower fall in the cost of petroleum prices and the higher service fees. This year the BOK sees inflation averaging 0.7 percent before rising to 1.7 percent in 2016.
    "Looking ahead the Board forecasts that inflation will continue at a low level, due mainly to the effects of the low oil prices," said the BOK, which targets inflation of 2.5-3.5 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 been sustained, and that the modest improvements in the euro area have continued. Economic growth in emerging market countries including China has meanwhile continued to slow. 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 the possibilities exist of its being affected by heightened international financial market volatility due for example to a shift in the US Federal Reserve’s monetary policy, and by the weakening of economic growth in emerging market countries.

Looking at the Korean economy, although domestic demand activities have sustained their paces of recovery, driven by consumption, the trend of declining exports has persisted while the improvement in economic agents’ sentiments has been inadequate. On the employment front, the number of persons employed has increased steadily, and in October the unemployment rate fell compared to that in October of last year while the employment-to-population ratio maintained the same level. The Board forecasts that the domestic economy will continue its recovery going forward, centering around domestic demand activities, but in view of external economic conditions judges the uncertainties surrounding the growth path to be high.

Consumer price inflation rose from 0.9% the month before to 1.0% in November, due mainly to a narrowing of the scale of decline in petroleum product prices and to expansions in the extents of increase in service fees. Core inflation excluding agricultural and petroleum product prices also rose to 2.4%, from 2.3% in October. Looking ahead the Board forecasts that inflation will continue at a low level, due mainly to the effects of the low oil prices. In the housing market, meanwhile, the upward trends of sales and leasehold deposit prices have persisted in both Seoul and its surrounding areas and the rest of the country.

In the domestic financial markets, influenced mostly by expectations of a policy rate hike by the US Federal Reserve, stock prices have fallen, long-term market interest rates have risen, and the Korean won has depreciated against both the US dollar and the Japanese yen. Bank household lending has sustained a trend of increase at a level substantially exceeding that of recent years, led by mortgage loans.

Looking ahead, while working to sustain the recovery of economic growth, the Board 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 any changes in the US Federal Reserve’s monetary policy or in economic conditions in emerging market countries including China, the movements of capital flows, and the trend of increase in household debt."


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