The Bank of Korea (BOK) decided to leave its key rate unchanged for the second time on Tuesday, as the country faces sluggish economic growth.
For BOK Governor Lee Ju-yeol’s last monetary policy meeting, the central bank kept its benchmark interest rate on hold at 1.50 percent for the second month in a row, as expected by economists.
Lee stated that South Korea’s monetary policy is not determined automatically by the withdrawal of stimulus measures of the US, adding that they will make their future policy decisions comprehensively based on the economy, inflation, and the US monetary policy.
The bank made its first rate hike in six years in November, when it decided to raise rate by 25 points.
Head of Asia-Pacific Economics Tuuli McCully believed with only modest inflationary pressure, BOK will continue to be cautious in the coming quarters, given external trade-related risks, monetary policy, and geopolitics. They expect another rate hike in mid-2018.
Lee’s four-year term ends on March 31 and the presidential office have not announced who is going to take his place. A statement may come as early as this week.
South Korean Economy to Face Downside Risks in 2018
BOK saw the South Korean economy growing as expected, but improvement in facilities investment is slowing from the high rates last year, while construction investment continues its phase adjustment.
Last month, the bank revised this year’s economic growth forecast to 3 percent, while inflation expectations shrunk to 1.7 percent, which was lower than its 2 percent target.
Inflation fell from December’s 1.5 percent to 1 percent in January, its slowest pace in 17 months.
However, there are some negative factors that indicate the economy will only expand to 2.6 percent, such as tighter US protectionist trade policies, accelerated monetary normalizations in major countries, and the reorganization in the automobile industry.
The bank recognized the challenge from US trade policies, as South Korean industries that handle the largest trade surpluses with the US would be significantly affected by any tightening of the country’s trade curbs, which may include the auto and steel industries.
The US Commerce Department suggested imposing strong tariffs for South Korean steel products, following the US’ plans of enforcing anti-dumping tariffs of about 50 percent on washers and solar panels in January.
American automaker General Motors Co. will be shutting down its manufacturing plant in Gunsan, but Lee said such matter does not call for changes in BOK’s economic outlook.
However, it could greatly impact their economy if the plant closure expands further and the US pressure increases to their core industrial products.
Moreover, the Federal Reserve will also likely accelerate its monetary tightening plan, as the US economy shows signs of recovery.
South Korea and the US currently have the same base rates, after the central bank implemented an interest rate range of 1.25 to 1.50 percent.
If Fed hikes rate by 0.25 percent next month, BOK’s rate will be lower than the US for the first time in more than 10 years.
Lee said that the risk of major capital outflows from Asia’s fourth-largest economy was not big even if the US rate were to go higher than South Korea’s.
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