Bank of Korea Policy Still on Hold

April 11, 2013

Five interest rate increases between June 2010 and June 2011 raised such from 2.0% to 3.25%, but the last two changes of the seven-day repo rate were cuts of 25 basis points administered in July 2012 and October 2012.  The rate has been at 2.75% ever since and remains paused after this month’s policy meeting.  A statement from the Bank of Korea acknowledges geopolitical tensions with North Korea, the shift in Japanese monetary policy that has weakened the yen, and downward trending personal consumption in South Korea that will sustained a negative output gap for a considerable time and keep economic growth slow and inflation, now 1.3%, low. 

A number of analysts had thought officials slice the benchmark interest rate because of the geopolitical strains and won’s rise against the yen.  Ironically, a result of the high alert military status seems to have caused officials not to loosen credit further. “Stock prices have fallen substantially and the Korean won has depreciated significantly against the US dollar, as foreigners’ securities investment funds have flowed out in line with the reemergence of euro area risk and with the increase in geopolitical risk in Korea.”  Cutting the central bank rate could have generated even stronger capital outflows.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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