Monetary Policy Change
The central bank of Korea renounced its optimism about the recovery of the Korean economy amid increasing uncertainties both at home and abroad.
The dampened consumer and investor sentiment and increasing volatility in the value of the Korean currency were mentioned as two of the major risks of the Korean economy at the Monetary Policy Committee meeting held on June 12. These are key variables on which domestic demand and exports depend. The atmosphere of the meeting was quite different from last month, when Bank of Korea governor Lee Ju-yeol said that the base rate was likely to be adjusted upward.
As far as economic indices are concerned, today’s Korean economy is characterized by good export performance and extreme shrinkage in domestic demand. However, the export side is also increasingly threatened these days by the rapid appreciation of the won as of late. The central bank governor also spent much time explaining the negative impacts of the strong won during the meeting.
This has led to some change in monetary policy. “The possibility of the base rate increase mentioned last month was based on the monthly economic forecasts for April, and the central bank takes into account overall economic and financial conditions following foreign exchange fluctuations, rather than the specific level of the exchange rate, in making monetary policy decisions,” he said, adding, “Some unintended side effects could arise when interest rate policy is used to cope with foreign exchange fluctuations, which are determined by the supply and demand.” He continued, “It is true that many economic indices are deteriorating nowadays, including those relating to consumption and service-industry production, and we are now watching whether the Sewol ferry disaster will be only temporary or long-lasting to cause a change in monetary policy.”
He also mentioned that he would reflect a series of changes that occurred in May and this month to the central bank’s economic forecasts to be available next month. At present, the Bank of Korea is estimating the annual national economic growth rate at 4.0 percent. However, the Korea Development Institute (KDI) has recently adjusted its forecast downward from 3.9 percent to 3.7 percent, and the World Bank cut its estimate by 0.4 percentage points to 2.8 percent, too.