Wednesday, August 30, 2017

South Korea maintains rate, growth in line with forecast

    South Korea's central bank kept its base rate unchanged at 1.25 percent, as widely expected, saying economic growth is expected to be in line with the forecast from July, with consumption continuing its moderate recovery while a decline in foreign tourists will lead to slower services exports.
     The Bank of Korea (BOK), which has maintained its rate since June last year, also reiterated its guidance from July that it was maintaining its accommodative monetary policy stance "as the inflationary pressures on the demand side are not expected to be high although the domestic economy is expected to show solid growth."
      In July the BOK raised its growth forecast for this year to 2.8 percent from 2.6 percent, adding fiscal stimulus from the government could further boost growth.
      But while consumption is recovering and investment in facilities is likely to be above the level forecast in July, BOK said exports were likely to fall below forecasts due to the decline in tourists and construction investment is also likely to be below forecasts as the real estate market stabilizes.
     South Korea's Gross Domestic Product decelerated in the second quarter from the first quarter, with quarterly growth of 0.6 percent and annual growth of 2.7 percent, down from 2.9 percent in the first quarter.
     South Korea's headline inflation rose to a higher-than-expected 2.2 percent in July from 1.9 percent in June, above the BOK's 2.0 percent target, while core inflation rose to 1.8 percent from 1.3 percent.
     The BOK confirmed it expects consumer price inflation to fluctuate around the 2.0 percent level and average 1.9 percent this year, as forecast in July.
      Volatility in domestic financial markets has expanded, the central bank noted, with stock prices and the won fluctuating in line with an increase in geopolitical risks.
      Despite nervousness over North Korea's missile tests, South Korea's won has firmed this year on optimism over growth and was trading at 1,124 to the U.S. dollar today, up 7.4 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 global economic recovery has continued to expand. Global financial market volatility has meanwhile increased somewhat, due mainly to changes in expectations related to the monetary policies of major countries and to geopolitical risks. Looking ahead the Board sees the global economic recovery as likely to be affected by factors such as the paces of monetary policy normalization in major countries, the directions of the US government's economic policies, the movements toward spreading trade protectionism, and geopolitical risks.

The Board judges that the solid trend of domestic economic growth has continued, as exports have sustained their high rate of increase and consumption has recovered moderately although investment has temporarily slowed. Employment conditions have improved moderately, with the employment-to-population ratio having risen as the trend of year-on-year increase in the number of persons employed has expanded, centering around the manufacturing sector. Going forward domestic economic growth is expected to be generally in accord with the path projected in July. The Board judges that consumption will likely continue its moderate trend of recovery, due to the improvement in employment condition and to the execution of a supplementary budget. Facilities investment will likely be above the levels forecast in July, due to expanded IT industry investment. Exports are expected to fall below the July projection, however, as service exports have slowed owing to a decline in the number of foreign tourists, while construction investment will probably also be less than forecast, in consequence of real estate market stability.

Consumer price inflation has risen to the lower-2% level, in line mainly with increases in the prices of agricultural, livestock and fisheries products and with the base effect from the reduction of electricity fees last year. Core inflation (with food and energy product prices excluded from the CPI) has stayed in the mid-1% range, and the rate of inflation expected by the general public has remained at the mid-2% level. Looking ahead the Board expects that consumer price inflation will for the time being fluctuate at around the 2% level, and for the year as a whole show the level (1.9%) projected in July. Core inflation appears likely to be in the mid- to upper-1% range.

In the domestic financial markets price variable volatility has expanded, with stock prices, the Korean won-US dollar exchange rate and long-term market interest rates having fluctuated to considerable extents, in line with increases in geopolitical risks. Household lending has sustained its high rate of increase exceeding past years’ levels, although the amount of year-on-year increase has lessened somewhat. In the housing market, the trend of rising sales prices has slowed since the government’s announcement of housing market stabilization measures.

Looking ahead, the Board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level over a medium-term horizon, while paying attention to financial stability. As the inflationary pressures on the demand side are not expected to be high although the domestic economy is expected to show solid growth, the Board will maintain its stance of monetary policy accommodation. In this process it will closely monitor any changes in the monetary policies of major countries, conditions related to trade with major countries, the trend of increase in household debt, and geopolitical risks."


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