Bank of Korea Holds Rate for Sixth Month to Support Growth

The Bank of Korea kept its benchmark interest rate unchanged for a sixth straight month, as 14-year-low inflation provides room to support growth against risks from currency volatility.

Governor Kim Choong Soo and his board held the seven-day repurchase rate at 2.5 percent after a cut in May, the central bank said in a statement in Seoul today. All 16 economists surveyed by Bloomberg News predicted the outcome.

With speculation rising about an eventual tapering of monetary stimulus by the U.S. Federal Reserve, policy makers in Asia’s fourth-largest economy are grappling with higher volatility in foreign capital flows and the won. Finance minister Hyun Oh Seok said this month the authorities will act against “herd behavior” in the market as sharp moves in the won can affect the economy.

“The won moves are pretty unpredictable, rising and then falling, so the BOK will take a wait-and-see stance,” said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul. “The central bank may feel more confident about the economic outlook but will only begin to consider raising the rate late next year when inflation becomes a concern.”

The won climbed 0.5 percent to 1,066.84 per dollar as of 10:16 a.m. today in Seoul, rising after Fed chief nominee Janet Yellen calmed emerging-market outflow concerns, saying the U.S. economy and labor market need to improve before stimulus can be eased. The Kospi stock index rose 0.4 percent.

Capital Flows

Foreign investors turned net sellers after two months of buying, unloading $476 million of South Korean stocks and $737 million in bonds this month as of Nov. 12, official data show.

Inflation eased to 0.7 percent in October, staying below the central bank’s target range of 2.5 percent to 3.5 percent since May 2012 and under a five-year average of 2.7 percent.

The economy grew 1.1 percent in the third quarter from the preceding three months on domestic demand, matching an increase in April-through-June. The central bank last month cut its 2014 growth forecast to 3.8 percent from 4 percent.

Exports, worth about half South Korea’s gross domestic product, increased 7.3 percent in October from a year earlier, beating analyst estimates. Samsung Electronics Co. posted record third-quarter earnings on surging prices for memory chips and sales of cheaper Galaxy smartphones in emerging markets.

Employment, Growth

President Park Geun Hye introduced a 17.3 trillion won ($16 billion) extra budget in May, the same month the BOK delivered a surprise rate cut, seeking to revive an economy that grew 2 percent in 2012, the least in three years.

The BOK will increase its benchmark interest rate to 2.75 percent in the fourth quarter of next year, according to the median forecast in a survey of 21 economists by Bloomberg News.

The BOK should hold its key rate low for a “considerable” period and focus more on boosting employment and growth, said former Finance Minister Yoon Jeung Hyun, who was named by experts surveyed by the Korea Economic Daily as a possible candidate to succeed Kim whose term expires in March.

Korea Institute of Finance President Yun Chang Hyun, also tipped in the survey to be in the running to lead the central bank, urged the BOK in an interview to expand its mandate to include employment and growth on top of price and financial stability.

Economists forecast the Fed will begin tapering its asset purchases at its March 18-19 meeting March, paring the monthly pace of bond buying to $70 billion from the current pace of $85 billion, according to the median of 32 estimates in a Bloomberg survey Nov. 8.

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