Bank of Korea Keeps Same Accommodative Policy

November 12, 2009

The seven-day repo rate was left at 2.0% for a ninth straight month even though South Korea avoided a recession and experienced brisk GDP expansion in both the second and third quarters of 2009.  GDP advanced 12.3% at an annualized pace in 3Q and was even 0.6% higher than a year earlier.  After the global financial crisis escalated, the central bank implemented two rate cuts totaling 100 basis points in October 2008 followed by reductions of 25 bps in November, 100 bps in December, and 50 bps each in January and February.  Those actions cut the benchmark by 325 basis points from 5.25% to its current 2.0%.

Korea’s central bank will likely be one of the first to raise rates.  It in fact likely would have done so already if not for the very strong appreciation of the won against the dollar.  Today’s statement still speaks of an uncertain future growth path, implicitly acknowledging the potential drag from the won, which balances currently improving trends in exports, domestic demand, and industrial production.  Won appreciation also contains CPI inflation which was at an on-year rate of 2.0% last month.  The statement concludes that an accommodative policy stance will be maintained “for the time being.”  When central banks want flexibility to shift gears quickly, that’s the kind of language typically used to describe the status quo.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


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