South Korean Monetary Policy Unchanged in July

The Monetary Policy Committee of the Bank of Korea decided on July 11th to leave the Base Rate unchanged at 2.50 percent, citing the tapering off US quantitative easing and weak domestic demand as downside risks to growth.

Excerpt from the statement by the Bank of Korea:

The Committee expects the global economy to sustain its modest recovery going forward, but judges that the uncertainties related for instance to the possibility of an earlier-than-expected tapering off of US quantitative easing and of a slowdown in Chinese economic growth, and to the implementations of fiscal consolidation in major countries, remain as downside risks to growth.

In Korea, the Committee appraises economic growth to be continuing, albeit weakly, as exports have been generally favorable while indicators of domestic demand have alternated between improvement and worsening. On the employment front, the increase in the number of persons employed has accelerated, centering around the 50-and-above age group and the service sector. The domestic economy is expected to maintain a negative output gap for a considerable time going forward, due mostly to the slow recovery of the global economy, although the Committee forecasts that the gap will gradually narrow.

The Committee forecasts that inflation will show a stable trend for the time being as the output gap remains negative, although it will rise above its present level due mainly to a base effect from its low rate of increase in the second half of last year. As for housing prices, those in Seoul and its surrounding areas declined, while those in the rest of the country continued their slight uptrend.

In the domestic financial markets, as in the international financial markets, the volatility of price variables has increased with the possibility of an earlier-than-expected tapering off of US quantitative easing. Stock prices have fallen substantially due to outflows of foreigners’ stock investment funds, while long-term market interest rates have risen in concert with those of major economies. After having depreciated greatly, the Korean won has appreciated to a considerable extent.

Looking ahead, while closely monitoring the trends and the influences of changes in external risk factors, and the effects of May’s Base Rate cut and of the government’s economic policies including the supplementary budget, the Committee will conduct monetary policy so as to keep consumer price inflation within the inflation target range over a medium-term horizon while ensuring that the growth potential is not eroded due to the continuation of slow growth.

South Korean Monetary Policy Unchanged in July

Joana Taborda |
7/11/2013 9:18:24 AM