South Korea Holds Base Rate Steady At 1.25%


The Bank of Korea left its base rate steady for the 11th straight meeting at a record low of 1.25 percent in July, as widely expected. While saying the pace of increase in consumption had remained weak, policymakers judged domestic economy would continue its trend of recovery going forward and raised economic growth outlook for this year to 2.8 percent from an earlier forecast of 2.6 percent.

For 2017, the central bank projected private consumption to rise by 2.2 percent, faster than a previous forecast made in April of 2.0 percent. Facilities investment are expected to grow by 9.5 percent, higher than 6.3 percent seen previously. Also, construction investment is estimated to expand 6.5 percent, better than an earlier forecast of 4.5 percent. Exports are expected to rise 3.5 percent, compared to 3.3 percent seen previously.     

Excerpts from the statement by The Bank of Korea:


The Board judges that the solid trend of domestic economic growth has continued, as exports and investment have improved although the pace of increase in consumption has remained weak. On the employment front, the trend of year-on-year increase in the number of persons employed has slowed, and the employment-to-population ratio and the unemployment rate have risen. The Board sees the domestic economy as likely to continue its trend of recovery going forward, and forecasts a rate of GDP growth for this year higher than the April projection (2.6 percent). Exports will sustain their trend of improvement, thanks chiefly to the global economic recovery, and domestic demand activities will also recover moderately, owing to improved economic agents’ sentiments.

Consumer price inflation has continued at the 2 percent target level, in line mainly with increases in the prices of agricultural, livestock and fisheries products. Core inflation (with food and energy product prices excluded from the CPI) has stayed in the mid-1 percent range, and the rate of inflation expected by the general public has remained at the mid-2 percent level. Looking ahead the Board expects that consumer price inflation will for the time being fluctuate at around the 2 percent level, and for the year as a whole show the level (1.9 percent) projected in April. Core inflation appears likely to be in the mid- to upper-1 percent range.

In the domestic financial markets, price variable volatility has expanded somewhat, with the Korean won-US dollar exchange rate having risen considerably, in line with changes in expectations related to the monetary policies of major countries and with increases in geopolitical risks, and long-term market interest rates having increased in concert with government bond rates in major countries. Stock prices have continued to climb, on the effects for example of the trend of solid domestic economic growth and expectations of improved performances at major companies. Household lending has sustained its high rate of increase exceeding past years’ levels, although the amount of year-on-year increase has lessened somewhat. In the housing market, the trends of rising sales and leasehold deposit prices have expanded, centering around 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 the inflationary pressures on the demand side are not expected to be high although the domestic economy is expected to show solid growth, the Board will maintain its stance of monetary policy accommodation. In this process it will closely monitor any changes in the monetary policies of major countries, conditions related to trade with major countries, the directions of the government's economic policies, the trend of increase in household debt, and geopolitical risks.


Bank of Korea | Rida Husna | rida@tradingeconomics.com
7/13/2017 8:37:35 AM