Bank of Korea Holds Rate Even as Yen Clouds Export Outlook

BOK Governor Kim Choong Soo
Kim Choong Soo, governor of Bank of Korea, attends a monetary policy meeting at the central bank's headquarters in Seoul on Jan. 9, 2014. Photographer: SeongJoon Cho/Bloomberg

The Bank of Korea kept its benchmark interest rate unchanged for an eighth straight month, citing strength in Asia’s fourth-biggest economy even as a weak yen threatens some industries competing with Japanese companies.

Governor Kim Choong Soo and his board held the seven-day repurchase rate at 2.5 percent after a cut in May, the central bank said in a statement in Seoul today. Eighteen of 19 economists surveyed by Bloomberg News predicted the outcome, with Goldman Sachs Group Inc. foreseeing a cut.

The economy is now growing near its potential, with inflation set to rise to the central bank’s target range in the second half of 2014, Kim said at a press conference. At the same time, the weak yen may hurt South Korea’s automobile, steel and machinery industries, he said.

“The bank sounded more upbeat today as the recovery is more evident now,” said Lee Jae Hyung, a fixed-income analyst at Tongyang Securities Inc. in Seoul. “But the credit market is still very volatile so it won’t be easy for the BOK to change the interest rate for a while, even as the weak yen issue persists.”

The BOK is likely to keep the interest rate unchanged this year, Lee said.

Kim said South Korea’s economy will expand 3.8 percent in 2014, maintaining the central bank’s projection, with growth accelerating to 4 percent next year. Today’s rate decision was unanimous, Kim said.

Weathering Yen

The won was up 0.2 percent at 1,062.70 per dollar as of 3:39 p.m. in Seoul. The Kospi stock index declined 0.7 percent.

The won’s rise to a five-year high against the yen is putting a burden on the economy, President Park Geun Hye said on Jan. 6.

For now, South Korea’s overseas shipments are weathering the yen’s decline of about 16 percent against the won over the past year. Exports rose 7.1 percent in December from a year earlier, exceeding analysts’ estimates.

“Should Japanese competitors take advantage of the weaker yen to slash prices, then Korean exporters will face greater price competition and this poses downside risks to growth,” HSBC Holdings Plc. economist Ronald Man said. “Under such circumstances, policymakers in Seoul may feel the need to keep policy accommodative for an even longer period.”

Samsung Electronics

Kim said the South Korean currency is a “very important” consideration when the BOK makes its policy decisions. He said he was closely watching the won’s moves against the dollar and the yen.

The BOK may consider indirect financial assistance for industries hurt by the weak yen, Kim said.

The central bank will probably raise the policy rate to 2.75 percent in the fourth quarter, according to the median forecast of 26 economists surveyed by Bloomberg News.

Consumer prices rose 1.1 percent from a year earlier last month, with inflation staying below the central bank’s target range of 2.5 percent and 3.5 percent since May 2012.

On Jan. 7, exporter Samsung Electronics Co. reported its first profit decline in nine quarters due to intensifying global competition in the handset market. The company aims to boost its sales this year with new products, including bendable televisions.

Ruling party lawmaker Chung Woo Taik urged the BOK to cut its interest rate significantly to help the economy, according to a Yonhap Infomax report on Jan. 8. The public would benefit from lower borrowing costs while easing the pace of the won’s gain would be an efficient policy to help protect exporters, Chung said, according to the report.

The BOK may cut its policy interest rate in the near term, Kwon Goohoon, a Goldman Sachs economist based in Seoul, wrote in a research note on Jan. 6. Tightening financial conditions driven partly by won gains could undermine recovery momentum, he said.

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