Bank of Korea Keeps Rate Unchanged in Lee’s Final Policy Meeting

(Bloomberg) -- The Bank of Korea left its benchmark interest rate unchanged in Governor Lee Ju-yeol’s last policy meeting, as it weighs risks to its economic outlook against the cost of raising borrowing costs for the nation’s indebted households.

The unanimous decision to keep the seven-day repurchase rate at 1.5 percent was forecast by all 17 analysts surveyed by Bloomberg. 

“With the recent softening of inflation, record household debt and concerns of increasingly protectionist measures by the U.S, the BOK is likely to maintain its accommodative stance to ensure sustainable inflation and growth over medium-term horizon, ” Lim Puo Hua, at Continuum Economics said after the decision. Lim anticipates a rate hike in the second half of 2018.

Korea’s solid economic growth is continuing, the bank said in a statement, and while inflation has slowed, it’s expected to pick up toward the target of 2 percent in the second half of 2018. The BOK raised its 2018 growth forecast to 3 percent in January but trimmed its inflation forecast to 1.7 percent.

External risks to that outlook include stronger U.S. trade protectionism and a faster-than-expected Federal Reserve tightening cycle.

Multiple increases by the Fed would push the U.S. benchmark rate higher than Korea’s and make South Korean assets less attractive. Yields on most Korean government bonds are already below those of U.S. bonds, reflecting diverging policy expectations.

Fed Watching

Even if the BOK’s benchmark interest rate falls below the Fed’s, the BOK doesn’t expect large capital outflows, according to Governor Lee, due to factors such as the significant amount of foreign-exchange reserves and the current-account surplus. Central banks and sovereign wealth funds account for a significant proportion of foreign investors in the bond market, reducing the likelihood of large outflows, Lee said.

The BOK doesn’t need to respond automatically to the Fed’s policy changes, Lee said, noting that it’s expected to hike three times this year, based on the dot plot. He added that while trade pressures from the U.S. aren’t yet at a level which would force the BOK to adjust growth projections, it could hurt the economy if it was expanded to other sectors.

Lee Successor

Lee’s four-year term ends on March 31 and the presidential office hasn’t indicated who his successor might be. An announcement could come as early as this week. No law prevents Lee from serving another term, but it would be unusual. Analysts say President Moon Jae-in would want to appoint a new governor to make his mark on monetary policy.

Economists in a survey said they saw the pace of Fed tightening, as well as softer inflation and household debt in South Korea, limiting policy options for the incoming BOK governor. Six of seven economists said their rate forecast would remain unchanged regardless of who is named the new chief.

The won has traded in a range this year after gaining strength during the fourth quarter of last year. It traded 1,073.15 per dollar as of 12:14 p.m. The yield of three-year government bonds was up one basis point on Tuesday to 2.28 percent.

--With assistance from Myungshin Cho and Kyungji 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, James Mayger

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