The Bank of Korea (BOK), which cut its rate by 50 basis points in 2014, said the growth of the country's exports had slowed somewhat, a much more downbeat view than last month when it said exports continued to be favorable, and added that domestic demand had not been strong while the sentiment of economic agency remained weak.
Korea's Gross Domestic Product expanded by 0.9 percent in the third quarter of 2014 from the second quarter for annual growth of 3.2 percent, down from 3.5 percent in the second quarter and the second consecutive quarter of decelerating growth.
Along with slowing growth, Korea's inflation rate has also been falling with the inflation rate down to 0.8 percent in December from November's 1.0 percent due to fall in petroleum prices. The BOK expects that inflation will gradually rise from the second half of this year after remaining low due to low oil prices and a hike in cigarette prices.
Economists had expected the BOK to hold its rate steady today but cut its rate in coming months. The central bank is also scheduled to revise its 2015 economic forecasts later today. Its most recent forecasts projects growth of 3.9 percent this year.
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 a solid economic recovery in the US has been sustained, the sluggishness of
economic activities in the euro area has continued while economic growth in
emerging market countries such as China has slowed somewhat. 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
weakening of economic growth in the euro area and China, by financial and
economic unrest in the oil-producing countries, and by geopolitical risks.
Looking at the Korean economy, while export
growth has slowed somewhat the Committee judges that the recovery of domestic
demand has not been strong and the sentiments of economic agents remain weak. 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, but that the negative output gap will persist for a considerable
time.
Consumer price inflation fell from 1.0%
the month before to 0.8% in December, due mainly to an increase in the scale of
decline in petroleum product prices. Core inflation excluding agricultural and
petroleum product prices registered 1.6%, as in November. Looking ahead the
Committee forecasts that inflation will gradually rise from the second half of
this year, after remaining at a low level despite the hike in cigarette prices
under the influence for example of international oil price movements. In the
housing market, sales and leasehold deposit prices continued their uptrends—centering
around Seoul and its surrounding areas in the former case and around the rest
of the country in the latter.
In the
domestic financial markets, stock prices have fallen due for example to stock
price declines in other major countries and to the net selling of domestic
stocks by foreigners. After rising, long-term market interest rates have fallen
back. The Korean won has appreciated against the US dollar, due mainly to the
widening of the current account surplus and to a slowdown in Japanese yen
depreciation, while appreciating against the yen as the synchronization between
movements of the won and the yen has weakened. Bank household lending has
sustained its substantial uptrend, 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."
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