By CentralBankNews.info
South Korea’s central bank left its base rate unchanged at 1.50 percent and took note of the heightened volatility in international financial markets from the shift in U.S. monetary policy and the devaluation of China’s yuan, but sounded an upbeat tone about domestic consumption.
The Bank of Korea (BOK), which last month cut its growth forecast, said Korea’s exports had continued to decline but consumption and economic sentiment “appear to have improved” following a drop after the outbreak of Middle East Respiratory Syndrome (MERS).
Today’s statement contrasts with the BOK’s view in July when it said consumption had “declined significantly and the sentiments of economic agents have worsened.”
The change in tone is a reaction to the government’s 12 billion won stimulus to counter some of the dampening effects of the MERS virus on consumption, along with an end to the outbreak, but the BOK added that uncertainties surrounding the growth path remain high.
The BOK on July 8 cut its 2015 growth forecast to 2.8 percent from 3.1 percent forecast in April due to severe drought and the impact of MERS. In the second quarter of this year.
Korea’s Gross Domestic Product expanded by 0.3 percent from the first for annual growth of 2.2 percent, down from 2.5 percent in the first quarter.
Today the BOK’s research department said the country’s economy was “showing modest improvements on the domestic demand side with the subsiding of the MERS outbreak,” as consumption “recovered considerably during July.
As in recent months, the BOK said it still sees the global economy as sustaining its modest recovery though this could be affected by financial markets’ reaction to the change in the Federal Reserve’s policy, this week’s devaluation of the yuan and weaker growth in emerging markets.
Last month the BOK had taken note of the volatility in financial markets from the situation in Greece, changes in monetary policy of major countries and weaker growth in emerging countries.
Korea’s inflation rate was steady at 0.7 percent in July, the same rate as in June, and the BOK repeated that it expects inflation to continue “at a low level” due to low oil prices.
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 1.50% for the intermeeting period.
Based on currently available information the Committee considers that the trend of economic recovery in the US has been sustained, and that the improvements in the euro area have continued as well. Economic growth in emerging market countries including China has meanwhile continued to slow. The Committee forecasts that the global economy will sustain its modest recovery going forward, centering around advanced economies such as the US, but judges that the possibility exists of its being affected by heightened international financial market volatility due to a shift in the US Federal Reserve’s monetary policy and to the devaluation of the Chinese yuan, and by the weakening of economic growth in emerging market countries.
Looking at the Korean economy, exports have continued their trend of decline but consumption and the sentiments of economic agents, after having contracted due mainly to the shock from the Middle East Respiratory Syndrome (MERS) outbreak, appear to have improved. On the employment front, the employment-to-population ratio in July maintained the same level as that during July of last year, but the trend of increase in the number of persons employed slowed and, due mainly to an expansion in job search activities, the unemployment rate rose compared to that in July last year. The Committee forecasts that the domestic economy will show a trend of recovery going forward, owing chiefly to the expansionary macroeconomic policies and to the ending of the MERS outbreak, but judges the uncertainties surrounding the growth path to be high.
Despite cuts in electricity fees, consumer price inflation registered 0.7% in July, the same as in June, in line mainly with expansions in the extents of increase in service prices. Core inflation excluding agricultural and petroleum product prices was 2.0% in July, also the same as in June. Looking ahead the Committee forecasts that inflation will continue at a low level, due mainly to the effects of the low oil prices. In the housing market, the upward trends of sales and leasehold deposit prices have continued in both Seoul and its surrounding areas and the rest of the country.
In the domestic financial markets, influenced mostly by expectations of a policy rate hike by the US Federal Reserve and by the devaluation of the Chinese yuan, stock prices have fallen and the Korean won has depreciated sharply against both the US dollar and the Japanese yen. Long-term market interest rates have fallen slightly, in response mainly to interest rate movements in major countries. 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 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 the trend of increase in household debt and external risk factors such as any shift in the US Federal Reserve’s monetary policy and the financial instabilities in some emerging economies, as well as the trends of capital flows.”
