Bank of Korea Cuts Base Rate to 2.25% from 2.5%

August 14, 2014

Although the South Korean base rate hadn’t changed since cuts of 25 basis points each in November 2012 and May 2013, today’s action was anticipated by market players because of the dovish statement in July that revealed one dissent in favor of a rate cut at that month’s meeting.  Today’s statement warns of the possibility of weaker-than-assumed recovery caused “by the changes in global financial market conditions stemming from the shift in the US Federal Reserve’s monetary policy stance, by the weakening of economic growth in some emerging market countries and by geopolitical risks.”  Equally important, the statement judges “that improvements in domestic demand, which had contracted due mainly to the impacts of the Sewol ferry accident, have been insufficient.”  It is noted that South Korea’s output gap will only narrow at a “moderate” pace and that inflationary pressure will remain “subdued for the time being.”  CPI inflation of 1.6% presently lies below the 2.5-3.5% medium-term target.  The statement does not imply another cut will be undertaken soon, leaving the impression that the move today was intended as a preemptive move against a weaker-than-baseline scenario.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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