Bank of Korea Leaves Key Rate Unchanged as Risks to Economy Grow

(Bloomberg) -- The Bank of Korea stood firm in the face of rising risks to its export-dependent economy, including slowing global growth and an escalation of the U.S.-China trade war.

The central bank kept the seven-day repurchase rate at 1.75%, as forecast by all but one of 24 analysts surveyed by Bloomberg.

BOK Governor Lee Ju-yeol said the domestic economy was recovering after an unexpected contraction in the first quarter, and would continue to do so in the second half of the year. The central bank still needed to consider financial stability as well as global economic conditions, he said, noting that household debt remained "very high" by any measure.

"If you look at both the macro-economy and financial stability together, I think it’s not the time to deal with the current situation with a rate cut," Lee said.

Dissenting View

Not everyone on the BOK board agreed with the decision. One member, Cho Dong-chul, voted to lower the rate, a move that was widely anticipated by BOK observers. Dissenting votes are seen by many as signs of a potential policy move ahead.

Lee acknowledged the speculation about a rate cut, and that minority opinions can turn into majority ones, but said Cho for now represented only one person’s view, while he spoke for the majority.

"The governor’s comments today were less dovish than expected," said Tieying Ma, an economist at DBS Bank. "Essentially, there was no signal that the BOK is preparing for an immediate rate cut.”

Lee said there was growing concern about the prospects of a prolonged U.S.-China trade war. Yet government spending and improving exports will support a continued recovery in the second half of the year, he said.

The yield on three-year bonds slipped 3 basis points to 1.59% following Lee’s briefing. The South Korean won fell 0.1% to 1,189.60 per dollar as of 12:55 p.m.

What Bloomberg’s Economists Say

"Escalation in the trade war could push the BOK closer toward a rate cut later this year, though we think the central bank’s focus on financial stability means it will send a clear signal before it makes any shifts in its policy stance."

--Justin Jimenez, economist
Click here to view the report

While global growth continues to slow, the BOK said in a statement, the domestic economy is still seen expanding this year in line with the central bank’s April projection of 2.5%.

Data released earlier Friday showed factory output held up better than expected in April, rising 1.6% from a month earlier, versus a median forecast for a 1% gain. Yet the government also reported that exports are likely to drop for a sixth straight month in May, citing slumping prices for semiconductors and the global slowdown. Trade data will be released June 1.

Inflation Risks

The BOK said inflation will remain below 1% for some time before rising to the low- to mid-1% level in the second half of the year, with risks to the downside. The BOK projected 2019 inflation of 1.1% at its April meeting.

Cho earlier this month expressed concern about inflation getting "excessively low," but Governor Lee said Friday concerns about the risk of deflation are excessive.

Inflation rose to 0.6% in April, after touching 0.4% a month earlier. The BOK’s target is 2%.

--With assistance from Shinhye Kang.

To contact the reporters on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net;Hooyeon Kim in Seoul at hkim592@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Henry Hoenig, Paul Jackson

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