Korea holds rate, demand fluctuates, sentiment sluggish

    South Korea's central bank left its base rate steady at 2.0 percent, as expected, saying exports have been favorable while domestic demand has fluctuated between an improvement and worsening, and economic sentiment has been sluggish.
    But the Bank of Korea (BOK), which has cut its rate twice this year - most recently in October - by a total of 50 basis points, also said inflation is expected to remain low for the time being and then gradually rise next year while prices in the housing market in Seoul and the surrounding area continued its uptrend.
    While supporting economic recovery, the BOK said it would conduct monetary policy to maintain price stability and financial stability by monitoring shifts in the monetary policies of major countries along with the trends in household debt and capital flows.

    The Bank of Korea issued the following statement:

"The Monetary Policy Committee of the Bank of Korea decided today to leave the Base Rate unchanged at 2.00% for the intermeeting period.

Based on currently available information the Committee considers that, although the trend of economic recovery in the US has been sustained, the sluggishness of economic activities in the euro area has continued while trends of economic growth in emerging market countries have differed from country to country. The Committee forecasts that the global economy will sustain its modest recovery going forward, centering around the US, but judges that the possibility exists of its being affected by changes in the monetary policies of major countries, by the prolongation of economic sluggishness in the euro area, by the weakening of economic growth in some emerging market countries, and by geopolitical risks.

In Korea, the Committee judges that exports have sustained a favorable pattern, that indicators of domestic demand have been alternating between improvements and worsening, and that economic agents’ sentiments have been sluggish. 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 negative output gap in the domestic economy will gradually narrow going forward, albeit at a moderate pace.

Consumer price inflation rose from 1.1% the month before to 1.2% in October, due mainly to a narrowing of the extent of decline in agricultural product prices. Core inflation excluding agricultural and petroleum product prices fell to 1.8%, from 1.9% in September, owing primarily to slowdowns in the rates of industrial product price increase. The Committee forecasts that, after remaining low for the time being, inflation will gradually rise next year. In the housing market, sales and leasehold deposit prices in both Seoul and its surrounding areas and in the rest of the country continued their uptrends.

In the domestic financial markets, the Korean won has depreciated considerably against the US dollar but appreciated significantly against the Japanese yen, in line with the US dollar’s strength globally and with the Japanese yen’s weakness due mainly to the expansion of the Bank of Japan’s quantitative and qualitative monetary easing. Stock prices have rebounded, after having fallen significantly due for example to concerns about the slowdown of the global economy and to outflows of foreigners’ securities investment funds. Long-term interest rates have declined.

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 shifts in major countries’ monetary policies, as well as the trends of household debt and of capital flows."

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