Bank of Korea Holds Rate Steady With Inflation Below Goal

(Bloomberg) -- The Bank of Korea left its key interest rate unchanged on Thursday as inflation remains below target and the nation’s currency trades near a multi-year high.

The unanimous decision to keep the seven-day repurchase rate at 1.5 percent, in the next-to-last rate decision before Governor Lee Ju-yeol’s term ends in March, was forecast by all 17 analysts surveyed by Bloomberg. The BOK also raised its economic growth forecast for this year to 3 percent, from 2.9 percent, while lowering its inflation projection by the same amount to 1.7 percent.

With exports growing, Korea’s economy looks to be on a solid footing, but any policy changes are expected to be gradual after the increase in borrowing costs at the last meeting in. The central bank is mindful of muted inflationary pressure, and higher rates can bring further appreciation in the won.

“The lowering of the inflation forecast suggests the BOK can hold rates for some time,” said Paik Yoon-min, a fixed-income analyst at Kyobo Securites Co. in Seoul. “With Korea not being a key currency country, it may be able to endure up to two more rate hikes by the Federal Reserve, but the BOK would have to start raising in the third quarter.”

A majority of analysts surveyed by Bloomberg on longer-term rate projections forecast the next increase to come in the second quarter or later. Only five of 25 expected it to take place in the first quarter.

Currency Comments

Lee said recent won strength, which reached more than a three-year high earlier this month, is due to easing geopolitical tension, economic growth and a weaker dollar. He said there seems to have been some herd behavior in the strength,

The won was steady at 1,068.75 per dollar as of 12:22 p.m. on Thursday. The yield on three-year government bonds declined four basis points to 2.18 percent.

Lee reiterated the BOK’s stance that cryptocurrencies aren’t legal tender, and that recent trade shows speculative motives and herd behavior.

With the central bank staying pat Thursday, the U.S. benchmark rate could soon surpass Korea’s if the Federal Reserve raises rates in March, as expected by many.

Yet Bank of America Merrill Lynch sees the rate differential -- which may widen to 50 basis points in the first half of the year, according to the bank’s estimates -- as unlikely to cause capital outflows. Korea has substantial foreign-exchange reserves and a large current-account surplus, BofAML economists including Sylvia Sheng wrote in a report.

President Moon Jae-in has given no hints about who he will choose to succeed Lee. Moon’s choice will face hearings in parliament, although lawmakers don’t have the power to block the appointment if the president presses ahead.

©2018 Bloomberg L.P.