Bank of Korea holds key rate at 1.25 pct, cuts inflation forecast for this year

As widely anticipated, the Bank of Korea Monetary Policy Board today decided to keep the key interest rate on hold for the fourth consecutive month at 1.25 percent. The central bank also cut its inflation projection for this year, while keeping the growth forecast unchanged.

The Monetary Policy Board, looking at the South Korean economy, mentioned that exports have dropped; however, domestic demand activities seem to have continued with their recovery. Investment in construction has mainly driven the improvement. Meanwhile, the number of people employed in September slowed down, while the jobless rate rose as compared to September 2015.

The board projects the domestic economy to sustain the modest growth trend going forward, thanks mainly to a gradual rebound in global trade and to the effects of expansionary macroeconomic policies. That said, the board considers the uncertainties regarding growth path to be high given the economic conditions at home and abroad. It expects the GDP to grow 2.7 percent this year and 2.9 percent next year.

On the inflation front, the board projects that the consumer price inflation would gradually accelerate, mainly due to the diminishing effects of the temporary reduction in electricity fees and to the recovery in international oil prices.  The central bank expects consumer prices to rise 1.1 percent this year, as compared with the earlier forecast of 1.1 percent. For the next year, it expects inflation to average 1.9 percent.

Looking ahead, the board would conduct monetary policy in order to safeguard the continuity of economic rebound and that the consumer price inflation nears the target level in a medium-term horizon. The BoK is expected to keep a close watch on the trend of rise in household debt, the progress of corporate restructuring and any changes in the monetary policies of major nations.