Bank of Korea to maintain accommodative stance

Economy

Published: 29 Dec. 2016, 19:44

Bank of Korea to maintain accommodative stance

The Bank of Korea (BOK) will sustain its accommodative monetary policy stance in 2017, according to a report on its plan for next year’s monetary policy on Thursday.

“The BOK will likely proceed in the direction of keeping its accommodative stance,” the central bank said, “as the country’s economy will maintain a modest growth along with slow expansion of consumption.”

The accommodative stance refers to attempts to expand the overall money supply to boost the economy when growth is tepid.

In managing its monetary policy, the central bank will consider financial stability amid the volatility associated with interest rate hikes in the United States and growing risks stemming from surging household debt.

The proclaimed focus implies that the central bank will take on a more cautious approach towards rate cuts, which can swell the size of household debts.

This lines up with the view expressed by BOK Governor Lee Ju-yeol. After the rate-setting decision in December, Lee expressed skepticism for an imminent rate cut.

“I know there are voices advocating a rate cut,” he said, “but we are in a situation where economic stabilization carries weight.”

He added that in deciding the benchmark rate, the BOK should “factor in different points, including surging household debt, the possibility of capital outflows and macro-economic conditions.”

The country’s central bank also projected an increased consumer price index next year due to growing oil prices, though the figure has remained persistently low below the BOK’s inflation target of 2 percent.

“Consumer prices are expected to move closer to the inflation stability target,” he said, “boosted by increasing oil prices and eased worries over global deflation.”

Still, oil prices and foreign currency moves will likely act as factors increasing uncertainties surrounding consumer prices.

The country’s economy will likely grow in the 2 percent range. Analysts hope for a recovery in global demand for exports and an increase in facility investment, while sluggish domestic consumption and construction investment will serve as a setback.

The BOK noted that the political uncertainties associated with the ongoing influence peddling scandal will depress domestic consumption, increasing downside risks.

Another change in 2017 is that the central bank will have rate-setting meeting eight times a year, a departure from the current practice of holding one every month.

Based on the comments by the governor, the BOK would refrain from aggressively steering the economy. Lee said earlier this month that fiscal policy should play a more active role in the current economic circumstances.

Experts echoed the view.

Shin Sung-hwan, president of the Korea Institute of Finance, said on Wednesday that monetary policy only has a limited effect, calling for a more aggressive use of budget spending.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]