Bank of Korea Holds Rate at Record Low, Trims GDP Forecast

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The Bank of Korea held its key interest rate at a record low, opting to monitor the impact of recent cuts in borrowing costs and the government’s fiscal stimulus program.

The decision to keep the seven-day repurchase rate at 1.5 percent was forecast by all 18 analysts surveyed by Bloomberg. It follows four rate cuts since August, including one last month as a “preemptive move” against the economic fallout from the Middle East Respiratory Syndrome.

Governor Lee Ju Yeol trimmed the bank’s forecast for growth this year to 2.8 percent and maintained his projection for inflation of 0.9 percent. Previous rate cuts and the government’s extra budget will support the economy, Lee said, while warning that the bank has a close eye on swelling household debt.

“Governor Lee was neutral about future policy decisions, but the market has less faith in him now than before,” said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul. “The policy rate is likely to remain at 1.5 percent for this year, but there are more downside risks to growth, including situation in Greece, MERS and a drought.”

The government said on July 3 that Korea will release 15 trillion won ($13.2 billion) through an extra budget to support businesses hurt from the spread of MERS and a drought.

Lee said today that the Greek debt crisis, China’s economic outlook and a potential increase in interest rates by the Federal Reserves all add to uncertainty for Korea.

Falling Exports

Since the first reported case in the country on May 20, MERS had infected in 186 people and left 35 dead, as of July 8, according to the health ministry.

Overseas sales fell 1.8 percent in June from a year earlier, a sixth monthly drop. Industrial production dropped 2.8 percent in May from the previous year.

ING Groep NV, National Australia Bank Ltd., and HSBC Holdings Plc are forecasting an additional rate cut to 1.25 percent this year.

The yield on South Korea’s five-year treasury bonds reached more than a six-week high of 2.14 percent on July 3, Korea Exchange prices show, amid reports that the government would sell more bonds to fund the extra budget. It was 2.07 percent as of 12:29 p.m. in Seoul on Thursday.

The won weakened 1.8 percent against the dollar and 2.8 percent against the yen this month, as turmoil in Greece increased the demand for safer assets, prices compiled by Bloomberg show.

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