Bank of Korea Holds Interest Rate as Inflation Trails Target

(Bloomberg) -- The Bank of Korea left its key interest rate unchanged on Thursday, as inflation is expected to remain below its target for the time being and trade tensions are clouding the outlook.

The economy remains on track to grow 3 percent this year but inflation is projected to register 1.6 percent, slightly below the central bank’s previous forecast, Governor Lee Ju-yeol said during a news conference.

The decision to keep the seven-day repurchase rate at 1.5 percent was widely expected, and the small inflation downgrade -- from 1.7 percent -- did little to alter expectations for further rate increases during the second half of the year.

"We see risks to Korea’s growth and inflation outlooks as balanced and still see a chance of two rate hikes later this year," said Ma Tieying, an economist at DBS Bank. Ma said inflation may pick up in coming months due to higher prices for oil and other raw materials.

Still, some investors took the inflation forecast as a sign that the prospects for rate increases have dimmed, with the won weakening to 1,070.55 at 1:17 p.m. local time.

Lee said Korea’s policy of letting the market determine foreign-exchange rates, except for intervention during times of volatility, will remain the same even if an agreement is reached with the U.S. Treasury and the International Monetary Fund on revealing market interventions. Some analysts say this would limit future interventions and put pressure on the won to appreciate, but Lee said he disagreed with this view.

Trade Risk

Korea’s exports have helped drive growth of around 3 percent but inflation has sagged in recent months, hitting 1.3 percent in March, well below the BOK’s 2 percent target. In the minutes of the board’s February rate decision, some members expressed doubts about whether inflation could accelerate in the near term.

Signs of moderation in the economy are already visible, said Barnabas Gan, an economist at Oversea-Chinese Banking Corp. Recent disappointing data include trade and inflation readings, as well as March’s Purchasing Managers’ Index.

Lee said the trade dispute between China and the U.S., Korea’s two biggest trading partners, is unlikely to develop into a full-blown trade war, although tension will persist. The risks to Korea’s economy could be offset if the government’s proposed extra budget is approved, and China fulfills its promise to permit more tourists to travel to Korea.

Data showed a recovery in Chinese tourist arrivals in March, Lee said on Thursday.

--With assistance from Myungshin Cho

To contact the reporters on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net, Hooyeon Kim in Seoul at hkim592@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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