Korea holds rate, inflation seen considerably below target

    South Korea's central bank left its base rate steady at 1.50 percent, as expected, but said it expects that inflation will "fall considerably short" of its inflation target due to a further fall in oil prices and the disappearance of the impact of a rise in cigarette prices from the inflation rate.
    The Bank of Korea (BOK), which cut its rate by 50 basis points in 2015,  also repeated its view held in recent months that it would closely monitor rising household debt, along with any changes in U.S. monetary policy, China's economic and financial conditions and movements in capital flows.
   The BOK acknowledged that growth in emerging markets, including China, had continued to slow hile the U.S. economy was continuing to expand and "the modest improvements in the euro area have continued," which means that the global economy will maintain its "moderate" recovery.
    Korea's economy is being helped by a recovery of domestic demand while the trend of declining exports persists. In October the BOK forecast that Gross Domestic Product would rise by 3.2 percent this year while inflation would rise by 1.7 percent.
    In the third quarter of this year, South Korea's GDP rose by an annual 2.7 percent, up from 2.2 percent in the previous quarter while inflation in December rose by 1.3 percent from 1.0 percent in November, below its 2.0 percent target.
    "Looking ahead the Board forecast that consumer price inflation will fall considerably short of the 2% inflation target for the time being, owing mainly to the disappearance of the effect from the cigarette price hike and to the recent further declines in international oil prices," the BOK said.

   
    The Bank of Korea issued the following statement:
   
"The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 1.50% for the intermeeting period.

Based on currently available information the Board considers that the trend of economic recovery in the US has been sustained, and that the modest improvements in the euro area have continued. Economic growth in emerging market countries including China has meanwhile continued to slow. The Board forecasts that the global economy will maintain its recovery going forward, albeit at a moderate pace, centering around advanced economies such as the US, but judges that the possibilities exist of its being affected by factors such as the US Federal Reserve’s monetary policy normalization, Chinese financial market conditions, and international oil price movements. 

Looking at the Korean economy, although domestic demand activities have sustained their paces of recovery, driven by consumption, the trend of declining exports has persisted while economic agents’ sentiments have not improved. On the employment front, as the trend of increase in the number of persons employed expanded in December, the employment-to-population ratio rose compared to that in December the year before while the unemployment rate fell. The Board forecasts that the domestic economy will continue its recovery going forward, centering around domestic demand activities, but in view of external economic conditions judges the uncertainties surrounding the growth path to be high.

Consumer price inflation rose from 1.0% the month before to 1.3% in December, due chiefly to increases in agricultural product prices and to a narrowing of the extent of decline in petroleum product prices. Looking ahead the Board forecasts that consumer price inflation will fall considerably short of the 2% inflation target for the time being, owing mainly to the disappearance of the effect from the cigarette price hike and to the recent further declines in international oil prices. Core inflation excluding agricultural and petroleum product prices meanwhile registered 2.4%, the same as in November. In the housing market, the upward trends of sales and leasehold deposit prices slowed somewhat in both Seoul and its surrounding areas and the rest of the country.

In the domestic financial markets, stock prices and long-term market interest rates have fallen, influenced mostly by instabilities in the Chinese stock market and by the declines in international oil prices, while the Korean won has depreciated substantially against both the US dollar and the Japanese yen, on the effects in addition of Chinese yuan devaluation and increased geopolitical risks. Bank household lending has sustained a trend of increase at a level substantially exceeding that of recent years, led by mortgage loans.

Looking ahead, while working to sustain the recovery of economic growth, the Board 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 any changes in the US Federal Reserve’s monetary policy or in financial and economic conditions in China, the movements of capital flows, and the trend of increase in household debt. "

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