Monday, February 26, 2018

South Korea maintains rate and accommodative stance

      South Korea's central bank kept is base rate steady at 1.50 percent, as expected, and poured cold water on any expectations that it is getting closer to another rate hike by reiterating its guidance from last month that it will maintain its accommodative policy stance as inflationary pressures from demand "will not be high for the time being."
      The Bank of Korea (BOK), which in November last year raised its rate for the first time since June 2011, also confirmed that it still expects inflation to slowly rise from the low to mid-single digits and gradually approach its 2.0 percent target level from the second half of 2018.
      South Korea's inflation rate eased to 1.0 percent in January from 1.5 percent in December, with the BOK last month forecasting that inflation would average 1.7 percent this year then rise to 2.0 percent in 2019.
      Next year inflation is seen close to 2.0 percent target as demand side pressures start to rise in synch with the domestic economy. Core inflation, which excludes energy and groceries, is forecast at 1.8 percent this year and 2.0 percent in 2019.
      South Korea's economy is showing solid expansion with exports rising and consumption and investments showing favorable changes, BOK said, adding construction investment had fallen.
     Gross Domestic Product grew by an annual 3.0 percent in the fourth quarter of last year for annual growth of 3.1 percent, up from 2016's 2.8 percent.
       The BOK in January raised its 2018 growth forecast to 3.0 percent from 2.9 percent, with its exports continuing to benefit from the global recovery while private consumption is also expected to improve from last year.
       For 2019 the BOK expects 2.9 percent growth, close to the economy's potential growth rate.
       South Korea's won strengthened steadily last year but has gave up some of its gains in February. Today the won was trading at 1,070.2 to the U.S. dollar, down 0.4 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 1.50% for the intermeeting period.
Based on currently available information the Board considers that the acceleration in global economic growth has continued. Volatility in the global financial markets has increased substantially, with government bond yields rising and stock prices falling in line mainly with strengthening expectations of monetary policy normalizations in major countries. Looking ahead the Board sees global economic growth 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, and the movements toward spreading trade protectionism.

The Board judges that the solid trend of domestic economic growth has continued, as exports are sustaining their buoyancy and consumption and facilities investment have shown favorable movements, although construction investment has declined. The trend of improvement in employment conditions appears to have remained moderate, even though the extent of increase in the number of persons employed accelerated in January owing to temporary factors. Going forward the Board expects domestic economic growth to be generally consistent with the path projected in January. It anticipates that investment will slow, but that the trend of steady increase in consumption will continue, due in large part to improvements in household income conditions, and that exports will also sustain their favorable movements thanks to the buoyancy of the global economy.

Consumer price inflation has slowed to the 1% level recently, in consequence mainly of declines in the prices of livestock products and of a reduction in the extent of increase in personal service fees. Core inflation (with food and energy product prices excluded from the CPI) has fallen to the low 1% range, and the rate of inflation expected by the general public has remained at the mid-2% level. Looking ahead it is forecast that consumer price inflation, after remaining in the low- to mid-1% range for some time, will pick up and gradually approach the target level from the second half of this year. Core inflation will also gradually rise.

In the domestic financial markets the volatility of price variables has expanded considerably, in reflection of global financial market movements. Long-term market interest rates have risen, stock prices have declined and the Korean won-US dollar exchange rate has fallen, after having previously increased. Household lending has shown a higher rate of expansion than in past years, although the amount of its expansion has continued to decline. Housing sales prices have shown low rates of increase overall, but have risen faster in some parts of Seoul and its surrounding areas.
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 it is forecast that inflationary pressures on the demand side will not be high for the time being, while the domestic economy is expected to continue its solid growth, the Board will maintain its accommodative monetary policy stance. In this process it will judge carefully whether it is necessary to adjust its accommodative monetary policy stance further, while closely checking future economic growth and inflation trends. It will also carefully 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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