South Korea cuts rate 2nd time and will keep easy stance

October 16, 2019

By CentralBankNews.info

South Korea’s central bank lowered its benchmark base rate for the second time this year, saying it was maintaining an accommodative monetary policy stance due to moderate domestic growth, and low inflation and would judge whether to adjust the degree of monetary policy accommodation while observing the effect of two rate cuts and any changes to economic and financial stability.

As expected, the Bank of Korea (BOK) cut its base rate by another 25 basis points to 1.25 percent and has now cut it by 50 points this year.

South Korea’s economy, closely tied to the health of the global economy due to its exports, has slowed this year due to weaker domestic growth and BOK said the pace of the global economic growth has continued to slow as trade has contracted.

“Going forward, the Board expects domestic economic growth to fall below the July projection, owing chiefly to the continued US-China trade dispute and heightened geopolitical risks,” BOK said.


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In July BOK lowered its 2019 growth forecast to 2.2 percent from 2.5 percent and late last month Governor Lee-Ju-yeol said growth was likely to be lower than this forecast.

A new forecast will be released next month.

South Korea’s economy grew by an annual 2.0 percent in the second quarter of this year, up from 1.7 percent in the first quarter.

Inflation turned negative in September, falling 0.4 percent after a flat reading in August, and BOK said inflation will fall short of the path projected in July and fluctuate for some time around zero and then rise to the 1.0 percent range from next year.

In July BOK forecast inflation would fluctuate below 1.0 percent for some time and then be at the low to mid-1.0 percent level in 2020.

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 lower the Base Rate by 25 basis points, from 1.50% to 1.25%.
Based on currently available information the Board considers that the pace of global economic growth has continued to slow as trade has contracted. The global financial markets have shown high levels of volatility, affected mainly by the uncertainties concerning the US-China trade dispute and the sluggishness of economic indicators in major countries. 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 changes in the monetary policies of major countries, and geopolitical risks.
The Board judges that the pace of domestic economic growth has remained slow, as consumption growth has weakened, while the adjustment in construction investment and the sluggishness in exports and facilities investment have continued. Employment conditions have partially improved, with the increase in the number of persons employed having risen. Going forward the Board expects domestic economic growth to fall below the July projection, owing chiefly to the continued US-China trade dispute and the heightened geopolitical risks.
Consumer price inflation recorded a negative rate, in consequence mainly of the declines in the prices of petroleum products, agricultural, livestock and fisheries products, and public services. Core inflation (with food and energy product prices excluded from the CPI) has been at the mid-0% range, and the rate of inflation expected by the general public has fallen to the upper-1% level. Looking ahead, it is forecast that consumer price inflation will fall short of the path projected in July and fluctuate for some time at around the 0% level, and then run in the 1% range from next year. Core inflation will also gradually rise.
In the domestic financial markets, long-term market interest rates and stock prices have risen and the Korean won-US dollar exchange rate has fallen, with major price variables fluctuating considerably due to movements in the global financial markets. The rate of increase in household lending has continued to slow. Housing prices have remained steady overall but have risen in 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 expected that domestic economic growth will be moderate and it is forecast that inflationary pressures on the demand side will remain at a low 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, while observing any changes in macroeconomic and financial stability conditions and the effects of the two Base Rate cuts. It will also carefully monitor the US-China trade dispute, any changes in the economies and monetary policies of major countries, the trend of increase in household debt, and geopolitical risks.”