Bank of Korea Keeps Rates on Hold and an Eye on the U.S.
|The Bank of Korea kept its Base Rate unchanged at 1.25 percent, while noting a firming in the outlook for the domestic economy and the up- and down-side risks of U.S. fiscal and monetary policy on the global economy.
Global Expansion and Firming Domestic Economy
Earlier today, the Bank of Korea’s (BoK) Monetary Policy Board opted to leave the target interest rate unchanged at 1.25 percent. Given the importance of trade to the South Korean economy, it is not uncommon for the statement accompanying the monetary policy decision to focus on international developments. Still, it is notable how prominently U.S. fiscal and monetary policy factor into the BoK’s assessment of the global economy and its impact on Korea. The BoK sees the global recovery as being affected by “the directions of the US government's economic policies, the pace of monetary policy normalization by the U.S. Federal Reserve, the movements toward spreading trade protectionism, and political uncertainties in major countries.”
On the domestic front, the BoK cited improving employment trends and a firming in exports as key factors in its judgment that the South Korean economy is growing slightly faster than its projected path in April.
Inflation and Consumer Debt and Spending Dynamics
In the first four months of 2017, CPI inflation in South Korea has been within two-tenths of a percentage point of the BoK’s 2.0 percent target. Stripping away food and energy prices, core CPI has been running about half a percentage point slower. Today’s statement noted the role of rising prices in petroleum and agriculture as well as livestock and fishery products in lifting headline inflation, while acknowledging that core inflation would remain in the “mid- to upper- 1% range.”
We are growing increasingly concerned about elevated levels of consumer debt in South Korea. According to BoK’s own data, household debt has doubled since 2008. The growth in consumer debt is outpacing growth in the broader economy. Over the same 2008-2016 time period, nominal GDP there has only increased 26.7 percent. The BoK tacitly recognized this dynamic without expressing too much caution observing that the rate of household lending growth is showing signs of lessening. Governor Lee expressed a somewhat greater degree of concern in the press conference that followed the meeting. One key challenge for the BoK in coming quarters will be riding the line of balance between keeping rates low enough to stimulate growth without keeping rates so low that it engenders even more consumer leveraging. If South Korea’s households, which tend to be older-aged, take on too much debt with low interest rates, it could hold back future consumer spending, particularly if rates eventually rise. Newly elected South Korean President Moon Jae-in is well aware of the growing indebtedness of the household sector and has pledged to lift government spending.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.