By CentralBankNews.info
South Korea’s central bank cut its base rate by 25 basis points to 1.25 percent, a move financial markets had expected, due to rising downside risks to growth from domestic and international conditions.
The Bank of Korea (BOK) added that it was paying close attention to the possibility of a British exit from the European Union, changes in the monetary policies of major countries and capital flows, corporate restructuring and the rising household debt.
It was the first change in rates by the BOK in 12 months as its last rate cut came in June 2015 following a cut in March for total cuts in 2015 of 50 basis points.
Financial markets began expecting a rate cut today following the release of minutes from the policy board’s May meeting that showed one member had called for a rate cut “soon.”
Data showing that exports in May had contracted for the 17th consecutive month added to expectations for a rate cut.
In its statement, the BOK pointed to the continued decline in exports while domestic consumption had weakened and the sentiment of economic agents was sluggish.
“The Board forecasts that the domestic economy will sustain its trend of modest growth going forward, but in view of economic conditions domestically and abroad judges that the downside risks to the growth path forecast made in April have expanded,” the BOK said.
In its Economic Outlook from April the BOK forecast 2016 average growth of 2.8 percent, up from 2015’s 2.6 percent, and 3.0 percent for 2017. Exports were seen rising 0.8 percent this year, up from 0.5 percent last year, and then by 2.7 percent in 2017.
Korea’s economy expanded by an annual rate of 2.8 percent in the first quarter of this year, down from 3.1 percent in the fourth quarter of last year.
In April the central bank forecast consumer price inflation of 1.2 percent this year and 2.0 percent next year, up from 0.7 percent in 2015.
South Korea’s won has firmed since March following an appreciation in the first two months of the year. Today the won was trading at 1,156.2 to the U.S. dollar, up 1.7 percent this year.
The Bank of Korea issued the following statement:
Looking at the Korean economy, exports have continued their trend of decline and the improvements in domestic demand activities such as consumption have weakened, while the sentiments of economic agents have also been sluggish. On the employment front, although the pace of increase in the number of persons employed slowed somewhat in April, the employment-to-population ratio and the unemployment rate maintained the same levels as in April of last year. The Board forecasts that the domestic economy will sustain its trend of modest growth going forward, but in view of economic conditions domestically and abroad judges that the downside risks to the growth path forecast made in April have expanded.
Consumer price inflation fell from 1.0% the month before to 0.8% in May, owing chiefly to a slowdown in the extent of increase in agricultural product prices. Core inflation excluding agricultural and petroleum product prices also declined to 1.6%, from 1.8% in April. Looking ahead the Board forecasts that consumer price inflation will continue at a low level, under the influence of the low oil prices for example. In the housing market, sales and leasehold deposit prices showed low rates of increase.
In the domestic financial markets since May, stock prices have risen after having previously fallen, in reflection mainly of global stock market movements, and long- term market interest rates have declined, influenced mostly by the sluggishness of some economic indicators. The Korean won has fluctuated to a large extent against the US dollar, affected mainly by changes in the expectations for a policy rate hike by the US Federal Reserve. The won has meanwhile depreciated against the Japanese yen. Household lending has sustained a trend of substantial increase at a level exceeding that of recent years, led by mortgage loans.
Looking ahead, the Board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation approaches the target level over a medium-term horizon, while paying greater attention to financial stability. In this process it will closely monitor the possibility of a British exit from the European Union, any changes in the monetary policies of major countries and capital flow movements, the progress of corporate restructuring, and the trend of increase in household debt.”
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