Bank of Korea Stands Pat on Interest Rates

(Bloomberg) -- South Korea’s central bank kept its key interest rate unchanged in the face of rising risks, and Governor Lee Ju-yeol said it’s not the right time to consider further monetary easing.

All but one of 25 analysts surveyed by Bloomberg had forecast the Bank of Korea would keep the seven-day repurchase rate at 1.75 percent on Thursday, while one projected a 25-basis-point cut.

The BOK actually raised borrowing costs in November, but mounting economic risks at home and abroad had stoked speculation that its next move would be a rate cut. Lee said policy would remain accommodative, but tamped down any expectations for a near-term cut.

The growth outlook for the year has been trimmed to 2.6 percent from 2.7 percent, and the inflation forecast to 1.4 percent from 1.7 percent, Lee said during a news conference.

The central bank doesn’t expected to diverge significantly from its potential level, thanks to increased government spending. It said inflation will fluctuate at the 1 percent level for some time and then steadily increase to the mid-1 percent level in the second half of the year.

Lee has previously indicated that the sharp drop in oil could bring a revision of the BOK’s price forecast. Most economists had expected the central bank to cut its estimate for gross domestic product because exports are weakening.

The Korean won was steady at 1,127.40 per dollar after the central bank’s decision. The yield on three year bonds was unchanged at 1.81 percent while 10-year yields gained 1 basis point to 1.99 percent.

"The BOK has clearly stated that it is focusing on maintaining financial stability amidst elevated global uncertainties," said Tuuli McCully, head of Asia-Pacific economics at Scotiabank in Singapore. "The central bank will likely maintain the wait-and-see mode over the coming quarters, allowing financial market turmoil to settle."

Lee has also suggested that a somewhat less-hawkish outlook for monetary policy in the U.S. could become a bigger swing factor for him and his board. Rates in the U.S. that are significantly higher than those in Korea tend to encourage capital outflows from the Asian economy, putting pressure on the BOK to raise its benchmark.

President Moon Jae-in’s government has vowed to shore up the economy amid weakness in hiring and investment. A stronger-than-expected growth figure in the fourth quarter was largely attributed to aggressive spending by the government.

The BOK also said it also carefully monitor conditions related to trade, along with any changes in the monetary policies of major countries, financial and economic conditions in emerging market economies, the trend of increasing household debt in Korea and geopolitical risks.

Most central bank watchers think Korean borrowing costs will remain unchanged this year.

©2019 Bloomberg L.P.