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Bank of Korea bucks rumors of swift tightening

Low inflation relative to economic growth could delay rate hikes
Dec 29,2017
The Bank of Korea said Thursday that it would maintain an accommodative monetary policy aimed at stimulating the economy by loosening money supply while taking a cautious approach toward further rate increases next year.

The policy direction announcement came after the central bank lifted interest rates from a record-low 1.25 to 1.5 percent for the first time in six and a half years last month on the basis of strong economic indicators.

The decision triggered discussion of whether the Bank of Korea would shift toward monetary tightening in a bold manner.

Thursday’s statement threw cold water on the rumors. The policy direction suggested the central bank would not pursue an aggressive about-face. Rather, it might seek some “adjustments” to its expansionary stance depending on conditions.

“The bank will judge carefully concerning any need for further adjustment in the level of its monetary policy accommodation,” the bank said, “which it has expanded in response to low growth and inflation until now, while also closely checking the trends of economic growth and inflation.”

Robust economic growth, strong exports and improved domestic consumption all contributed to the rate increase this year.

One factor that might get in the way of further rate increases is low inflation relative to the pace of economic recovery. Analysts expect the country’s consumer prices will come short of the Bank of Korea’s target of 2 percent this year.

The consumer price index registered 2 percent in January and picked up to 2.6 percent in August. But the rate retreated to 1.8 percent in October, dragged down by agricultural and food prices. The figure stood at 1.3 percent in November, the lowest this year.

The Bank of Korea expects inflation to remain at 1.8 percent next year, while the Ministry of Strategy and Finance projects 1.7 percent.

The central bank forecast stable economic growth, though various factors including protectionist sentiment in trading and geopolitical tensions with North Korea have posed challenges.

“The domestic economy is expected to maintain its solid trend of growth, at a rate of around 3 percent per year,” the bank said. “It is anticipated that exports will continue their trends of improvement, due to ongoing recovery of the global economy, and private consumption will pick up moderately driven in part by an increase in government fiscal spending.”

But construction and facilities investment will not pull off as successful readings, the banks noted, as the government has implemented measures to tighten lending and cool down the local real estate market.

Global economies will remain strong in 2018, the bank forecast.

“Advanced economies will continue to show stable growth, supported by improvements in employment and corporate investment,” the bank said, “while the momentum of growth in emerging markets like India and Brazil is expected to strengthen.”


BY PARK EUN-JEE [park.eunjee@joongang.co.kr]