South Korea holds rate but lowers growth expectations

January 23, 2019

By CentralBankNews.info
     South Korea’s central bank left its base rate unchanged at 1.75 percent and reiterated that it will maintain an accommodative monetary policy stance as inflationary pressures are not expected to be high and and economic growth will not diverge significantly from its potential level.
      But the Bank of Korea (BOK), which has raised its rate twice since November 2017 – most recently in November last year – also said it expects the country’s economic growth to “fall slightly short” of its forecast from October when it forecast 2019 growth of 2.7 percent.
      While BOK said South Korea’s economy was expanding around its potential level, it acknowledged the pace of global growth has slowed, with future growth affected by the spread of trade protectionism, the pace of monetary policy normalization in advanced economies and how Britain’s departure from the European Union evolves.
      South Korea’s Gross domestic product grew by a an estimated 1.0 percent quarter on quarter in the fourth quarter of last year and by 3.1 percent year on year, for annual growth of 2.7 for the full year, the slowest growth since 2012 and down from 3.1 percent in 2017.
      BOK said increases in consumption and exports had been sustained while “adjustments in facilities and construction investment have continued.”
      South Korea’s economy is seen a bellwether of the state of the global economy due to its strong export businesses.
      Illustrating softer global growth and the fallout from the trade conflict between the U.S. and China, South Korea’s exports fell 1.2 percent in December, sharply down from estimates of a 3.3 percent rise, and the first decline in three months, with semiconductor sales down 8.3 percent.
      South Korea’s won has been relatively stable since July last year but rose in response to BOK’s statement to trade at 1,126 to the U.S. dollar, down 1.1 percent this year.
       Inflation fell to 1.3 percent in December from 2.0 percent in November and BOK forecast that inflation will fluctuate around the 1.0 percent level for some time before rising in the second half of the year.
      BOK targets inflation of 2.0 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 1.75% for the intermeeting period.
Based on currently available information the Board considers that the pace of global economic growth has slowed somewhat. The volatilities in the global financial markets, which had previously expanded, have diminished slightly this year, in line mainly with the possibility of the US Federal Reserve adjusting the pace of its rate hikes and with expectations of progress in the US-China trade negotiations.
Looking ahead, the Board sees global economic growth and the global financial markets as likely to be affected by factors such as the degree of the spread of trade protectionism, the paces of monetary policy normalization in major countries, and the uncertainties concerning Brexit.
The Board judges that the domestic economy has sustained a rate of growth at its potential level generally, as the increases in consumption and exports have been sustained, although the adjustments in facilities and construction investment have continued. Employment conditions have been sluggish, with the amount of increase in the number of persons employed having lessened substantially in December.
Going forward the Board expects domestic economic growth to fall slightly short of the path projected in October, but to sustain a rate that does not diverge significantly from its potential level thanks to increased government expenditures for example.
Consumer price inflation has slowed to the lower-1% level, in consequence mainly of declines in the prices of petroleum products and reductions in the extents of increase in agricultural, livestock and fisheries product prices. Core inflation (with food and energy product prices excluded from the CPI) has been at the lower-1% level, and the rate of inflation expected by the general public has been in the mid-2% range. Looking ahead, it is forecast that consumer price inflation will fluctuate at the 1% level for some time and then steadily increase to the mid-1% level in the second half of this year. Core inflation will also gradually rise.
The domestic financial markets saw increased volatility in December last year, but have been generally stable since the beginning of this year. Stock prices had fallen, in line mostly with concerns about the global economic slowdown, but have rebounded on expectations of an easing of the US-China trade dispute for example. Long-term market interest rates, after a decline, have been fluctuating slightly. The Korean won-US dollar exchange rate has been generally stable while moving within a narrow range. The amount of increase in household lending has diminished, while housing prices have continued to slow.
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, and that the domestic economy will sustain a rate of growth that does not diverge significantly from its potential level, the Board will maintain its accommodative monetary policy stance.
In this process it will judge whether to adjust the degree of monetary policy accommodation further, while closely checking future economic growth and inflation trends. It will also carefully monitor conditions related to trade with major countries, any changes in the monetary policies of major countries, financial and economic conditions in emerging market economies, the trend of increase in household debt, and geopolitical risks.”

     www.CentralBankNews.info


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