Korea Holds Key Rate at Record Low as Lee Questions More Cuts

  • The benchmark borrowing cost has been at 1.5% since last June
  • Exports are falling and domestic demand is weak in South Korea

The Bank of Korea held the benchmark interest rate unchanged for a ninth month as Governor Lee Ju Yeol indicated that further cuts might have limited benefit.

The decision to keep the seven-day repurchase rate at a record low 1.5 percent was forecast by 11 of 18 economists in a Bloomberg survey. The remaining seven expected a 25 basis-point cut. Board member Ha Sung Keun dissented for a second straight month, again calling for a 25 basis point cut.

While the central bank expects the economy to keep growing, weakness in emerging markets is weighing down exports and consumption at home is on a downward trend. Lee warned that record-high household debt needs to be curbed while noting that volatility in global financial markets has eased. Capital outflows remain an area of concern.

"There may be constraints to how an interest rate cut affects the real economy when we have external uncertainties like we see now," Lee said in Seoul on Thursday. He said the bank’s assessment of the Korean economy was unchanged from last month and that monetary policy was already accommodative.

The won snapped two day’s of declines, strengthening 0.8 percent to 1,207.73 per dollar as of 1:04 p.m. in Seoul. The yield on three-year government bonds rose three basis points to 1.50 percent.

Growth Concerns 

“Lee’s trying to sound neutral but expectations for a rate cut are still rising,” said Yoon Yeo Sam, a Seoul-based fixed income analyst at Daewoo Securities Co. “Lee highlighted better parts of the economy but downside risks to growth are certainly increasing.”

The weakness in economic data in February was less pronounced than in January, but still trails the central bank’s expectations, Lee said during a press briefing. The BOK releases its updated economic forecasts next month, having most recently forecast 3 percent growth and 1.4 percent inflation for 2016.

Previous rate cuts have affected bond yields and credit growth, while the impact on the currency was more difficult to discern, according to Lee. The bank will continue to monitor markets and warned investors against "herd behavior."

Thursday’s meeting was the second-to-last gathering for a rate decision before four of seven board members leave on April 20, as their terms end. Among those who will leave are Moon Woo Sik, known to be the most hawkish, and Ha, the most dovish.

Foreign investors withdrew $152 million from Korean bonds and $1.4 billion from stocks this year as of March 9 amid uncertainty in emerging markets and rising tensions with North Korea. The finance ministry and central bank intervened verbally to steer investors on Feb. 19 and were suspected of having sold dollars in the market as the won traded at the weakest level in more than five years amid capital outflows and rate-cut bets.

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