Bank of Korea Holds Rate After Cut in May to Fight Yen Fall

The Bank of Korea left its interest rate unchanged after a surprise cut in May aimed at boosting an economy hit by a yen drop that gives Japanese companies an edge over Korean exporters.

Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate at 2.5 percent, the central bank said in a statement in Seoul today. All 15 economists surveyed by Bloomberg News predicted the move.

The central bank faces the task of supporting an economy burdened with rising household debt and a competitive challenge from Japan’s stimulus policies that have pushed the yen down about 17 percent against the won since the start of October. A surprise increase in May exports following the fastest pace of economic growth in a year in the first quarter pointed to resilience in Asia’s fourth-biggest economy.

“Should the growth outlook deteriorate in the second half of 2013, especially in key export markets, pressures may build on the central bank to deliver further rate cuts to support growth,” said Ronald Man, a Hong Kong-based economist at HSBC Holdings Plc. For now, “there is ample liquidity in the system,” he said.

The Kospi index extended its decline after the decision, falling 0.6 percent as of 10:23 a.m.

Unemployment, Inflation

The economy grew 0.8 percent in the first quarter from the previus three months as the government front-loaded spending after marking its slowest expansion last year since 2009. The unemployment rate unexpectedly rose to 3.2 percent in May from 3.1 percent in April, government data showed yesterday. Inflation fell to a 14-year low of 1 percent in May, below the central bank’s target range of 2.5 percent to 3.5 percent.

A reduction in the benchmark interest rate wouldn’t affect inflation much at this stage, Finance Minister Hyun Oh Seok said yesterday. “While an interest-rate cut may affect prices in situations where growth momentum reaches near the potential growth rate, such won’t be the case under current situation,” Hyun said at a parliament session.

The high level of household debt limits the central bank’s flexibility to cut interest rates, Jackit Wong, economist at Natixis Asia Ltd. said last week.

Bank loans to households increased by 2.6 trillion won in May to 465.1 trillion, close a record set in December, the central bank said yesterday.

Korea’s trade showed resilience. Exports increased 3.2 percent in May from a year earlier on strength in smart phone sales, faster than a 0.4 percent rise in April and against a consensus forecast for a 0.9 percent fall.

Finance Minister Hyun pledged this week to continue efforts to support growth in the second half of this year, with uncertainty increasing due to Japan’s stimulus programs and talk of an exit from quantitative easing in the U.S. Governor Kim agreed last week to respond to any side effects from monetary policies in major economies.

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