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 while pushing back against suggestions it may lower borrowing costs before too long.

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 rates in November, but mounting economic risks at home and abroad had stoked speculation that its next move would be a cut. Korea’s position may add to the view that many central banks in Asia are done with hiking rates for now.

"Some in the market have flagged the possibility of a rate cut following the Federal Reserve’s turn to a more dovish stance," said Governor Lee Ju-yeol. "But our current stance is already accommodative, so the BOK doesn’t think now is the time to discuss a rate cut.”

Bank of Korea Stands Pat on Interest Rates

The growth outlook for the year was trimmed to 2.6 percent from 2.7 percent, and the inflation forecast to 1.4 percent from 1.7 percent.

The central bank doesn’t expect growth 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 had previously indicated that the sharp drop in oil prices 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.

Bank of Korea Stands Pat on Interest Rates

The Korean won declined 0.1 percent to 1,128.15 per dollar as of 12:32 p.m. in Seoul. The yield for three-year bonds rose two basis points to 1.82 percent while 10-year yields gained one 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."

The BOK faces a dilemma. It can’t easily cut rates because of record household debt and the odds of a U.S. hike, while raising rates is a risk because of the slowing economy.

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.

Bank of Korea Stands Pat on Interest Rates

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.

What our economist says ...

"The Bank of Korea is probably set for a long pause, after keeping its policy rate unchanged at 1.75 percent at its first meeting of 2019," said Bloomberg Economics’ Justin Jimenez. "We expect fiscal policy to take the lead in supporting growth now."

For more, see our KOREA INSIGHT

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.