Wednesday, March 9, 2016

South Korea holds rate, sees low inflation on oil

    South Korea's central bank maintained its base rate at 1.50 percent, a decision in line with about half of economists surveyed, and said it expects inflation to remain low, mainly due to oil prices.
    The Bank of Korea (BOK), which cut its rate by 50 basis points last year, added that headline inflation rose to 1.3 percent in February from January's 0.8 percent, mainly due to higher agricultural prices while the housing market in Soul and the rest of the country showed low rates of increase.
    The BOK's view on inflation indicates that it is expecting slightly higher inflation in coming months than in January when it said that inflation was expected to "fall considerably short of the 2% inflation target for the time being."
     On the economy, the BOK largely repeated its view from January that the trend of decline in exports was continuing but the domestic economy will continue to recover on the back of domestic demand though uncertainties surrounding the growth path are high due to external conditions.
    South Korea's economy grew by an annual 3.0 percent in the fourth quarter of 2015, up from 2.7 percent in the third quarter.

    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 US economy has emerged from its temporary slowdown and shown a trend of moderate growth. However, the trend of economic recovery in the euro area has weakened somewhat, while economic growth in emerging market countries including China has 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 it will be affected by factors such as financial and economic conditions in China and other emerging market countries, international oil price movements, and global financial market volatility.

Looking at the Korean economy, the trend of decline in exports and the weakening recovery of domestic demand activities such as consumption are continuing, while the sentiments of economic agents have been sluggish. On the employment front, as the number of persons employed has steadily increased, the employment-to-population ratio rose in January compared to that in January last year, while the unemployment rate fell. 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 to a significant extent in February, from 0.8% the month before to 1.3%, owing chiefly to increases in agricultural product prices. Core inflation excluding agricultural and petroleum product prices meanwhile rose slightly to 1.8%, from 1.7% in January. Looking ahead the Board forecasts that consumer price inflation will continue at a low level, due mainly to the low oil prices. In the housing market, sales and leasehold deposit prices showed low rates of increase in both Seoul and its surrounding areas and the rest of the country.

In the domestic financial markets, influenced by the global stock market recovery and by a subsiding of foreigners’ securities investment fund outflows, stock prices have risen sharply since February and the Korean won, after having depreciated, has appreciated to a considerable extent against the US dollar. The won has meanwhile depreciated against the Japanese yen, in line with the yen’s strengthening. Long-term market interest rates have rebounded slightly after having declined, in response mainly to interest rate movements in major countries. Bank household lending has sustained a trend of increase at a level 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 monetary policies of major countries or in financial and economic conditions in China, the movements of capital flows, geopolitical risks, and the trend of increase in household debt."


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