Bank of Korea keeps policy rate on hold, expects economy to sustain modest growth

As widely expected, the Bank of Korea’s Monetary Policy Board kept the Base Rate on hold at 1.25 percent for the third consecutive month. According to the Board, the South Korean economy is expected to sustain its trend of modest growth in the future, mainly due to expansionary macroeconomic policies. However, the Board considers the uncertainties surrounding the growth path to be high.

Consumer inflation in the country decelerated to 0.4 percent in August from July’s 0.7 percent, thanks to the impact of a temporary reduction in electricity fees.  Core inflation, stripping petroleum and agricultural product prices also fell to 1.1 percent in August from 1.6 percent in July. In the housing market, the upward trends of sales and leasehold deposit prices have continued.

The Board projects that consumer price inflation would continue to be at a lower level for some time and then slowly accelerate because of the disappearance of the impact of the temporary electricity fee reduction and the softening influence of the lower oil prices.

On the domestic financial markets front, stick prices have increased since August as foreigners’ stock investment funds have registered net inflows consistent with continued risk-taking tendencies globally, according to the central bank’s press release.

Long-term market interest rates and the South Korean won-US dollar and KRW/JPY exchange rates have dropped after rising earlier, impacted mainly due to changes in the expectations of a policy rate hike by the US Fed. 

Household lending has sustained a trend of substantial rise at a level surpassing that of recent years, led by mortgage loans. In the future, the Monetary Council Board would conduct monetary policy to guarantee that the economic growth recovery continues and consumer price inflation reaches the target level in the medium-term horizon. The board would keep a close watch on the trend of rise in household debt, any alterations in the monetary policies of major nations, and the progress of corporate restructuring, the central bank mentioned in its statement.