The Bank of Korea left its main policy rate on hold at 2.50 percent at its policy meeting held today, in line with the consensus forecast. This rate has been cut by a cumulative 100 basis points since last October.

Since the previous BoK meeting in July, data have shown headline inflation ease from a five-month high of 2.2 percent in June to 2.1 percent in July, while core inflation was unchanged at 2.0 percent in July. Growth in exports picked up in July, but the PMI survey for South Korea's manufacturing sector showed a sixth consecutive contraction in June.

Despite steady underlying inflation and uncertainty about the impact of global trade tensions on the growth outlook, the statement accompanying today's decision shows officials remain somewhat concerned about house price growth in the Seoul area and higher household debt. Although they reiterated that they have a rate cut stance, officials concluded that they will adjust the timing and pace of any further rate cuts based on incoming data.

Forecasters expect the bank to hold off on a rate cut until the October meeting but markets are watching closely the BOK’s economic projections. For now the upside concern is housing price inflation and rising consumption in response to government payouts.

South Korea’s central bank, the Bank of Korea (BoK), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the base rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) at 2 percent over the medium-term.

The Bank of Korea determines interest rate policy at eight meetings during the year. A post-meeting statement is issued after each meeting. The Bank also publishes its Monetary Policy report four times a year and updates economic forecasts twice a year.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The Bank has an inflation target at 2 percent over the medium-term. The inflation control target is set by the Bank of Korea in consultation with the government and is reviewed every two years.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.