Bank of Korea Holds Rate as Weak Yen Threatens Exports

The Bank of Korea kept its benchmark interest rate unchanged, with near 14-year-low inflation giving it room to support a rebound in Asia’s fourth-biggest economy as a declining yen threatens exports.

Governor Kim Choong Soo and his board held the seven-day repurchase rate at 2.5 percent, the same level since a cut in May, the central bank said in a statement in Seoul today. All 15 economists surveyed by Bloomberg News predicted the outcome.

Policy makers are grappling with a won that rose to its highest against the yen since 2008 this week, threatening to hurt South Korean exporters’ competitiveness against Japanese companies. Outbound shipments gained less than economists forecast in November and Finance Minister Hyun Oh Seok said last week that authorities are watching the won’s moves against the Japanese currency.

“The weak yen can weigh on many South Korean exporters as Japan is a key rival in global markets,” said HI Investment & Securities’ Seoul-based chief economist Park Sang Hyun. “If Japan opts for more aggressive monetary stimulus and the yen falls much further, it would chill growth, forcing the BOK into further easing.”

The won gained 20 percent against the yen this year, hitting the highest since 2008 on Dec. 10, according to data compiled by Bloomberg. The Korean currency was 0.2 percent weaker against the yen at 12:24 p.m. in Seoul, trading at 10.283. The Kospi stock index was down 0.5 percent.

Weaker Yen

“Apart from the steel, electronics, and auto industries, the economy as a whole is coping fine” with the falling Japanese currency, Kim said to reporters after the policy decision. “I am not in a position to comment on how far the yen will reach, but there will be a limit and we need to monitor this and find ways to cope.”

South Korea’s exports rose 0.2 percent in November from a year earlier, slowing from a 7.2 percent increase the previous month on weaker demand in Indonesia and other Asian countries. The consensus forecast was for a 3 percent gain.

Consumer prices climbed 0.9 percent in November from a year earlier after a 0.7 percent increase in October that was the smallest gain since July 1999. Inflation has stayed below the central bank’s target range of 2.5 percent to 3.5 percent since May 2012.

Falling Unemployment

An unexpected drop in unemployment in November driven by the biggest increase in jobs since September last year pointed to strength in the domestic economy. The jobless rate fell to 2.9 percent, a record low in data back to June 1999, according to Statistics Korea data released yesterday. The median forecast in a Bloomberg survey of economists was for the rate to stay at 3 percent.

The BOK will probably raise the policy rate to 2.75 percent in the fourth quarter of next year, according to the median forecast of 27 economists surveyed by Bloomberg News. 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 in October cut its 2014 growth forecast to 3.8 percent from 4 percent.

President Park Geun Hye introduced a 17.3 trillion won ($16.4 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.

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