Frozen Key Rate
Korea’s central bank froze the key interest rate for the sixth consecutive month on November 14, as the domestic economy shows signs of moderate recovery amid low inflationary pressure.
Bank of Korea (BOK) Governor Kim Choong-soo and his six fellow currency policymakers unanimously agreed to keep the benchmark seven-day repo rate at 2.5 percent.
Governor Kim said that the Korean economy is expected to maintain a steady trend of recovery in the coming months along with the improvement of the global economy and the easing of uncertainties at home and abroad.
“Korea’s output gap remains negative for now, but the negative gap will disappear sometime in the second half of next year,” Kim said at a press conference. A negative output gap means that actual economic activity is underperforming the national economy’s long-term potential for growth.
The Korean economy grew 1.1 percent in Q3 from the previous quarter due to improving domestic demand and a pickup in facility investment. BOK estimates the growth rate this year will be 2.8 percent.
In the meantime, economic data indicates that the economic growth momentum is still not full-fledged. Korea’s industrial output shrank 2.1 percent in September from a month earlier, while exports recorded a new monthly high of US$50.5 billion in October, despite the won’s appreciation.
To the contrary, external economic uncertainties still persist as well. The European Central Bank cut the rate last week to support the growth of the Eurozone, while uncertainty over the timing of the Federal Reserve’s monetary stimulus tapering has been growing.
According to the central bank, Korea’s inflationary pressure remains subdued, as consumer prices are running below the BOK’s 2.5-3.5 percent inflation target band. The country’s consumer prices in October grew at the slowest pace in 14 years based on falls of farm product prices.
Analysts said that the BOK may hold the benchmark rate until the first half of next year.