South Korea Leaves Monetary Policy Unchanged


The Bank of Korea left its base rate steady for the 12th straight meeting at a record low of 1.25 percent in August, as expected, as policymakers assess the effect of government measures to cool property market and evaluate geopolitical risks.

In early August, the government announced it will raise capital gains taxes on owners of multiple homes and impose fresh mortgage curbs to rein in speculators. 

Excerpts from the statement by The Bank of Korea:

The Board judges that the solid trend of domestic economic growth has continued, as exports have sustained their high rate of increase and consumption has recovered moderately although investment has temporarily slowed. Employment conditions have improved moderately, with the employment-to-population ratio having risen as the trend of year-on-year increase in the number of persons employed has expanded, centering around the manufacturing sector. Going forward domestic economic growth is expected to be generally in accord with the path projected in July. The Board judges that consumption will likely continue its moderate trend of recovery, due to the improvement in employment condition and to the execution of a supplementary budget. Facilities investment will likely be above the levels forecast in July, due to expanded IT industry investment. Exports are expected to fall below the July projection, however, as service exports have slowed owing to a decline in the number of foreign tourists, while construction investment will probably also be less than forecast, in consequence of real estate market stability.

Consumer price inflation has risen to the lower-2 percent level, in line mainly with increases in the prices of agricultural, livestock and fisheries products and with the base effect from the reduction of electricity fees last year. 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 July. Core inflation appears likely to be in the mid- to upper-1 percent range.

In the domestic financial markets price variable volatility has expanded, with stock prices, the Korean won-US dollar exchange rate and long-term market interest rates having fluctuated to considerable extents, in line with increases in geopolitical risks. 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 trend of rising sales prices has slowed since the government’s announcement of housing market stabilization measures.

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 trend of increase in household debt, and geopolitical risks.

Bank of Korea l Rida Husna | rida@tradingeconomics.com
8/31/2017 6:15:38 AM