Bank of Korea Cuts Rate to Record Low of 1.75%


The Bank of Korea unexpectedly decided to cut the base rate by 25 bps to record low of 1.75 percent on March 12th. It is the first adjustment since October 2014 supported by sluggish domestic demand and weak outlook of the economy.

Excerpts from the statement by the Bank of Korea:
 
Looking at the Korean economy, the Committee notes that exports have decreased, due mostly to declines in the unit prices for example of petroleum products, that domestic demand activities such as private consumption and facilities investment have exhibited sluggish movements, and that the sentiments of economic agents have also not clearly recovered. On the employment front, the number of persons employed has expanded steadily, led by increases in the 50-and-above age group and in the service sector. The Committee expects that the domestic economy will show a modest trend of recovery going forward, although falling short of the originally forecast growth path. The period of continuation of the negative output gap will as a result also be longer than had been anticipated.
 
Consumer price inflation fell from 0.8% the month before to 0.5% in February, owing mainly to increases in the extents of decline in petroleum product prices and to the slower paces of increase in prices of industrial products other than petroleum. Core inflation excluding agricultural and petroleum product prices fell slightly to 2.3%, from 2.4% in January. Looking ahead, the Committee forecasts that, due mainly to the effects of the low oil prices, inflation will continue at a level lower than originally expected. In the housing market, the upward trends of sales prices accelerated slightly, while leasehold deposit prices continued their uptrend centering around Seoul and its surrounding areas.
 
In the domestic financial markets, after having risen on foreigners’ net buying of domestic stocks for example, stock prices have recently fallen under the influence mostly of declines in stock prices in major countries. The Korean won has depreciated against the US dollar, affected by the dollar’s strength globally and by the synchronization between movements of the won and the Japanese yen following the yen’s weakening, while it has fluctuated within a certain range against the yen. Long-term market interest rates had risen, but have since declined. Bank household lending has sustained its trend of increase at a level greatly exceeding that of recent years, led by mortgage loans.
 
Looking ahead, while supporting the recovery of economic growth the Committee will conduct monetary policy so as to maintain price stability over a medium-term horizon and pay attention to financial stability. In this process, it will closely monitor external risk factors such as international oil prices and shifts in major countries’ monetary policies, as well as developments related to the spare capacity in the domestic economy and the trends of household debt and capital flows.

Bank of Korea Cuts Rate to Record Low of 1.75%


Bank of Korea l Rida Husna l rida@tradingeconomics.com
3/12/2015 10:09:49 AM