South Korea’s central bank raised its base rate by 25 basis points for the second time in a year but said it would continue to maintain an accommodative monetary policy stance to ensure the economy continues to grow around its potential level while inflation remains near its target level.
The Bank of Korea (BOK) raised its base rate to 1.75 percent from 1.50 percent, as expected by most analysts, with the rate now at the same level as in May 2015. In November 2017 the rate was raised by 25 basis points.
“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,” BOK said.
The rate hikes comes after BOK Governor Juyeol Lee on several occasions signaled a rate hike to curb an overheated property market and rising household debt. Last month two of the Board’s seven members voted to raise the rate.
On Oct. 22, for example, Lee said it would be necessary to adjust the current accommodative policy stance to help ease financial imbalances and have room to deal with future economic cycles.
However, Lee also said he was not clear how many times BOK could raise the rate as the economy was showing signs of slowing.
In today’s statement, the central bank said the economy had been growing around its potential level and will continue sustain a steady path as consumption will continued to grow and “exports will also sustain their favorable movements thanks to the buoyancy of the global economy.”
However, BOK also acknowledged that investments have been slowing and will slow more.
In the third quarter South Korea’s economy slowed to annual growth of 2.0 percent from 2.8 percent in the previous three quarters and in October the BOK lowered its 2018 growth forecast to 2.7 percent from a previous 2.9 percent. Growth next year is seen at 2.7 percent.
In October South Korea’s inflation rate rose to 2.0 percent from 1.9 percent and BOK said it expects consumer price inflation to remain near its target level of 2.0 percent for some time before falling slightly and then fluctuating in the mid- to upper-1.0 percent range.
After dropping in June, South Korea’s won has been largely stable in recent months and was trading at 1,120.8 to the U.S. dollar today, down 4.9 percent this year.
The Bank of Korea released the following statement: