Bank of Korea Resists Rate-Cut Pressure Amid Threats of War

The Bank of Korea held borrowing costs unchanged for a sixth month, resisting pressure from the government for a reduction even as a sliding yen hurts the nation’s exporters and North Korea threatens war.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate at 2.75 percent, the central bank said in a statement in Seoul today. Nine of 20 economists surveyed by Bloomberg News predicted the move while the remainder forecast a 25-basis-point cut. The bank expanded a program of cheap loans for small businesses.

Kim said that the central bank’s monetary stance is already accommodative and in “harmony” with fiscal policy, rejecting pressure from the government for easing to accompany a planned stimulus package. While the Bank of Korea today pared its growth forecast for this year to 2.6 percent from a January estimate of 2.8 percent, Kim said that Asia’s fourth-largest economy is showing some signs of improvement.

“Economics have prevailed over politics,” said Ronald Man, a Hong Kong-based economist for HSBC Holdings Plc. “Eyes will now be on the supplementary budget, which is likely to be announced next week.”

South Korea’s one-year interest-rate swap jumped six basis points, or 0.06 percentage point, to 2.65 percent, according to data compiled by Bloomberg. That is the biggest increase since Aug. 16, 2012. The won rose 0.6 percent to 1,129.60 against the dollar as of 12:27 p.m. in Seoul. The Kospi stock index was up 0.1 percent.

Political Pressure

Cho Won Dong, chief economic adviser to President Park Geun Hye, said last week that “it will be better” if the Bank of Korea cuts interest rates. On March 28, the Finance Ministry lowered its forecast for economic growth this year to 2.3 percent from December’s 3 percent estimate. The won rose about 25 percent against the yen over the past six months.

Before today’s decision, Nomura Holdings Inc. saw a 45 percent chance that the Bank of Korea would succumb to political pressure and cut rates, giving the government “de facto control” over monetary policy, said Kwon Young Sun, a Hong Kong-based economist with the bank.

Today, Governor Kim said that fiscal and monetary policies are “heading in the same direction” even when the timing is different, adding that benefits are now flowing into the economy from last year’s rate cuts.

Inflation Forecast

Elevated household debt and a stagnant property market are constraints on an economy that Kim today said may continue to grow at less than its potential rate. The yen’s weakness along with reduced estimates for global growth were factors in paring the forecast for gross domestic product, he said. Inflation may be 2.3 percent this year, he added.

President Park and Finance Minister Hyun Oh Seok are preparing to roll out fiscal stimulus after the finance ministry said yesterday that any prolonged geopolitical risks may exacerbate economic weakness.

The possibility of a ballistic missile launch is “very high” and “may materialize anytime from now,” South Korean Foreign Minister Yun Byung Se told lawmakers in Seoul yesterday. South Korean and U.S. forces upgraded their joint surveillance “Watchcon” status by one level to monitor an imminent missile fire, Yonhap reported, citing unnamed military officials.

South Korea’s economy has expanded less than 1 percent for seven consecutive quarters, starting in April-June of 2011. Gross domestic product grew 0.3 percent in the fourth quarter of last year from the previous three months.

Reporters keen for early clues to rate decisions quizzed Kim today on whether the color of his tie -- grey versus red or blue on some previous occasions -- provided a signal. He said he couldn’t comment.

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; Cynthia Kim in Seoul at ckim170@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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