Bank of Korea Stands Pat in Face of Rising Uncertainties

(Bloomberg) -- The Bank of Korea stayed the course amid rising uncertainty on Thursday, leaving its benchmark interest rate unchanged in a unanimous decision.

The central bank is balancing concerns including record household debt and recent weak domestic economic data with external risks such as rising U.S. interest rates and global emerging-market instability.

Governor Lee Ju-yeol described uncertainties as high, and as the reason the central bank kept the seven-day repurchase rate at 1.5 percent, unchanged since a hike in November.

"While South Korea’s economy won’t deviate greatly from April forecasts, the BOK decided to maintain rates considering that inflationary pressures aren’t big on the demand side and that there is still a high level of uncertainty in internal and external conditions,” Lee said.

BOK Survey Finds Trade Protectionism, H’hold Debt Seen as Risks

Recent data has raised concerns about the outlook for the economy, and with inflation below the 2 percent target, all 18 analysts surveyed by Bloomberg expected the BOK to stand pat on Thursday. Some BOK watchers have recently pushed back their projections for the next rate increase, with the majority seeing a hike in the third quarter of this year. A few see no further action in 2018.

The won, which has been moving within a range of 1,055 to 1,092 this year, traded little changed at 1079.35 per dollar as of 12:41 p.m. in Seoul. While the won hasn’t succumbed to the volatility that’s hot some emerging-market currencies, Lee reiterated that foreign-exchange policy was unchanged and Korea can stabilize markets if needed.

Dovish Turn

"The comments from the BOK today were very dovish, especially with Governor Lee highlighting weakness in jobs and not showing a lot of concern about emerging-market instability," said Park Chong-hoon, an economist at Standard Chartered Bank in Seoul. "The possibility of a July rate hike seems to have declined, although I don’t plan to change my call yet as I need to check May and June economic data."

Investors were on guard for any sign of dissent on the board, which could have signaled a nearer-term rate hike. At the April meeting, two policy makers said interest rates should be increased at an appropriate time to minimize the risk of financial instability, according to minutes of the meeting. The decision Thursday suggests recent conditions have tempered the more-hawkish views on the board.

While the BOK noted sluggish employment conditions and slowing facilities investment, it maintained its outlook for the economy from a month earlier. It said inflation would remain in the mid-1-percent range for some time, and gradually approach its 2 percent target in the second half of the year.

It also noted that risks to growth include accelerated monetary policy normalization by major countries, increasing trade protectionism, and delayed improvements in employment conditions.

Optimism Weakens

Data that have dented optimism include slowing jobs growth and exports figures for April, which showed the first contraction since 2016. Although the BOK sees the economy expanding 3 percent this year -- above the potential growth rate -- Lee last week said it’s difficult to remain optimistic about it, citing a lack of improvement in the job market as one concern.

Analysts at Societe Generale SA, Australia & New Zealand Banking Group, and Goldman Sachs Group were among those who either withdrew their call for a rate hike this year or pushed back their projected timing. Nomura International Ltd., Bank of America Merrill Lynch, and Standard Chartered are among those who have forecast a July rate hike.

President Moon Jae-in was elected on a promise to be a “jobs president,” but the increase in employment from February through April eased to less than a third of that seen during the same period a year earlier, alarming some policy makers. Korea’s export growth depends heavily on semiconductors, making it vulnerable to a peaking of the tech cycle.

©2018 Bloomberg L.P.

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