South Korea Keeps Rates on Hold as Officials Watch Yen Slide
South Korea’s central bank kept interest rates on hold as officials monitor the won’s gains against the yen and look ahead to policy changes after President Park Geun Hye takes office Feb. 25.
Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate at 2.75 percent after a 25 basis point cut in October, the central bank said in a statement in Seoul today. For a second month, the decision was not unanimous. Fourteen of 15 economists surveyed by Bloomberg News predicted the decision and one forecast a cut.
Japan’s “expansionary policy operations'' and fiscal tightening in advanced nations are among risks for a South Korean economy that is showing signs of gradual improvement, the central bank said. The frontloading of government spending in the first half of the year is already giving growth a boost and Deutsche Bank AG says a supplementary budget may be announced by Park’s administration in March.
The central bank may “decide in March to see if fiscal stimulus is sufficient in terms of size and scope to reduce the level of uncertainty in the economy,” said Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore.
The won gained 0.2 percent to 1,084.80 per dollar at 10:42 a.m. in Seoul, according to data compiled by Bloomberg. It earlier rose as high as 1,084.27, near the strongest level since Feb. 6. The won was little changed at 11.60 per yen, according to data compiled by Bloomberg.
Commenting on currencies ahead of a meeting of Group of 20 finance officials in Moscow, Governor Kim told reporters that it’s “most desirable” for foreign-exchange rates to be set by market fundamentals. While the global currency debate and fiscal problems in advanced economies point to risks for South Korea, Kim doesn’t believe they will materialize, he said.
The governor said that the currency is an important consideration in interest-rate decisions, without being the determining factor.
As Japanese policy makers defend their efforts to counter deflation and spur growth, former Japanese Ministry of Finance official Eisuke Sakakibara took a different view yesterday, saying that his nation is hurting trading partners by weakening the yen.
“Guiding the yen lower is a policy that punishes neighboring nations,” Sakakibara, 71, said in an interview in Tokyo. Impressions overseas that Japan is trying to orchestrate further declines in the yen mean that “it will be criticized by the G-7, as well as the G-20,” he said.
Hyundai Motor Co. and Samsung Electronics Co. are grappling with the won’s 24 percent gain against the yen in the past six months, which aids rival exporters in Japan. The nation also faces risks from the totalitarian regime in North Korea, which this week tested a nuclear device.
At the same time, receding concerns over Europe’s debt crisis and the U.S. economic outlook may boost confidence and investment, helping to fuel a pick-up in Asia’s fourth-biggest economy.
“Borrowing costs at the current level are accommodative, supporting the economy,” Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul, said before the interest-rate decision. “Still, policy makers may want a rate cut as early as next month if exports tumble on a weak yen.”
South Korea’s economy needs to regain momentum after a 2 percent expansion in 2012 that compares with an average of 4.3 percent over the five years through 2007, before a U.S. housing market collapse triggered a global recession. The nation’s potential growth rate is about 3.8 percent, Governor Kim said Jan. 11.
“If growth stays low for long, it’s difficult, or even impossible, for it to return to its potential,” Kim said then. Today, the central bank said that the nation’s growth may be below potential for “a considerable time.”
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