BOK Holds Rates at Record Low, Cuts GDP and CPI Forecasts

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South Korea's Economy
Customers walk through the Noryangjin Fish Market in Seoul. Bank of Korea Governor Lee Ju Yeol said more time is need to see if recent signs of a pickup in the economy is a recovery trend. Photographer: SeongJoon Cho/Bloomberg

South Korea’s central bank cut growth and inflation forecasts while keeping the nation’s key interest rate unchanged as it monitors the impact of record-low borrowing costs.

Asia’s fourth-largest economy will expand 3.1 percent this year and prices will rise 0.9 percent, Bank of Korea Governor Lee Ju Yeol said Thursday. Both were lower than forecasts made as recently as January.

With inflation easing to the slowest pace since 1999, pressure may increase on Lee to consider another reduction in the seven-day repurchase rate. It now stands at 1.75 percent, after the BOK last month joined about 30 counterparts around the world in a wave of monetary easing this year.

“The central bank has become realistic with its economic forecasts, especially the CPI,” said Shin Hong Sup, a Seoul-based fixed-income analyst for Samsung Securities Co. “Still, some investors will be doubtful whether the economy will start a recovery, and continue betting for a further rate cut.”

The won appreciated 1.5 percent against the dollar this month to 1,093.38 as of 12:30 p.m. in Seoul, according to data compiled by Bloomberg. The currency strengthened 1.6 percent against the Japanese yen during the same period. The yield on three-year government debt fell three basis points today to 1.71 percent, Korea Exchange prices show.

‘Modest Recovery’

Governor Lee said more time is need to see if recent signs of a pickup in the economy is a recovery trend.

“It’s about time for accommodative policy steps we took to have an effect on the real economy,” Lee said at a briefing following the policy decision. “I expect to see a modest recovery from the second quarter onwards.”

The interest rate cut last month will help the economy in the second half of this year, Lee told reporters after the decision, which wasn’t unanimous, with one board member calling for a rate cut.

In a separate statement, the central bank said inflation would “continue at a low level, due mainly to the effects of the low oil prices.”

“Domestic demand activities such as consumption and investment appear to have improved, although exports have continued their trend of decline.”

Exports fell in every month this year, and the economy expanded at the slowest pace since 2009 in the last quarter of last year.

Lending to households by Korean banks rose to a record 526.9 trillion won in March, the central bank said in a statement on Wednesday.

Eight out of 26 analysts surveyed by Bloomberg last month forecast South Korea’s benchmark rate to be lowered to 1.5 percent this year. Two see an increase to 2 percent, while the rest expect no change.

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