Bank of Korea Holds Rate Steady as Economy Shows Resilience

The Bank of Korea held its key interest rate steady on economic resilience that is attracting foreign capital and made the won the best performer in Asia over the past month.

Governor Kim Choong Soo and his board kept the seven-day repurchase rate at 2.5 percent for a fourth straight month, the central bank said in a statement in Seoul today. All 15 economists surveyed by Bloomberg News predicted the move.

With inflation near its lowest since 1999, the BOK has room to keep its policy rate steady, as signs that China’s economy is rebounding back the central bank’s forecast that domestic growth will accelerate this year. Continued capital inflows, even as speculation of Federal Reserve tapering draws global investors to the U.S., reduce the need for the BOK to raise rates.

“The nation sees steady capital inflows unlike some other emerging countries, which gives much room for the Bank of Korea to keep the rate low for economic growth,” said Lee Sang Jae, chief economist at Hyundai Securities Co. in Seoul, before the announcement.

The BOK will increase its benchmark rate to 2.75 percent by the end of next year, according to the median forecast in a survey of 19 economists by Bloomberg News.

The Federal Reserve meets Sept. 17-18, with economists estimating the central bank will taper its monthly bond buying by $10 billion to $75 billion, according to the median of 34 responses in a Bloomberg News survey.

Easing Over

The won rose 0.4 percent to 1,082.25 per dollar as of 10:17 a.m. in Seoul. The Kospi stock index was roughly unchanged.

“The monetary easing cycle is over. Pressures stemming from potential tapering of asset purchases by the U.S. Fed will limit additional rate cuts in Korea,” said Ronald Man, a Hong Kong-based economist at HSBC Holdings Plc., said before the announcement. “The next move will likely be a 25-basis-point hike in the third quarter of 2014 when the global economy picks up again.”

The won rose about 2.8 percent against the dollar over the past month, bucking a sell-off in some other Asian currencies that pushed the India rupee down 3.3 percent and the Indonesia rupiah down about 9.1 percent.

Overseas investors bought a net 3 trillion won ($2.7 billion) in stocks and bonds in July, the most since February, according to the Financial Supervisory Service. August saw net outflows worth 536 billion won. Foreign investors bought more local equities than they sold for the 14th straight day on Sept. 11.

Stimulus

President Park Geun Hye introduced a 17.3 trillion won extra budget in May, the same month Governor Kim delivered a surprise interest rate cut, seeking to revive an economy that grew 2 percent in 2012, the least in three years.

Gross domestic product expanded 1.1 percent in the second quarter from the preceding three months, the most in more than two years, central bank data showed Sept. 5. The economy will expand 2.8 percent in 2013 and 4 percent next year, which would be the fastest since 2010, the central bank forecasts.

Exports, which account for around half of GDP, jumped 7.7 percent in August from a year earlier, the most since January, official data show. Hyundai Motor Co. (005380) and Samsung Electronics Co. (005930) will be among the biggest beneficiaries from the U.S. economic recovery.

Consumer inflation eased to 1.3 percent in August, below the central bank’s target range of 2.5 percent to 3.5 percent since June 2012. Inflation in May and June was 1.0 percent, the lowest since 1999.

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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