BOK Holds Rate to Support Economy as Won Rise Adds to Risks

South Korea’s central bank left its key rate unchanged and the government said it will speed up spending, seeking to spur growth that faces headwinds from a surge in the won and weaker consumption after a deadly ferry accident.

The Bank of Korea held the seven-day repurchase rate at 2.5 percent for a 12th straight month, it said in a statement in Seoul today, as forecast by all 16 economists in a Bloomberg News survey. The government plans to spend 57 percent of this year’s budget in the first half to support consumption, the finance and other ministries said in an e-mailed statement.

Governor Lee Ju Yeol is grappling with challenges from the ferry accident that has dented spending at hotels, restaurants, retailers, as well as a won at a six-year high against the dollar that risks tempering export growth. The BOK last month forecast inflation will pick up to its target range in the second half of 2014, with Asia’s fourth-biggest economy posting 4 percent growth for the full year, the fastest since 2010.

“Provided the economy continues to gather momentum, an eventual rate hike is probably inevitable,” said Gareth Leather, a London-based economist at Capital Economics. “But with inflationary pressures likely to remain subdued, we don’t think the BOK will rush into tightening.”

Herd Behavior

The won was the best performer in Asia against the dollar over the past year, rising 6.5 percent even as most other Asian currencies declined. The currency fell 0.2 percent to 1024.45 per dollar today in Seoul.

South Korea will strengthen monitoring to see if there are speculative moves in the foreign-exchange market and “sternly respond” to such moves that cause herd behavior, Finance Ministry Director General Choi Hee Nam said today in a text message.

While exports have so far bucked the won’s rise, climbing 9 percent in April from a year earlier, sustained strength in the currency could crimp South Korea’s shipments, according to Dongbu Securities’ strategist Moon Hong Cheol.

President Park Geun Hye held a meeting today with her ministers, heads of industries affected by the ferry sinking, and private-sector economists to discuss regional economic conditions. Consumer spending and service-industry activities are falling after the April ferry accident, the Finance Ministry said in a monthly economic report.

Ferry Accident

Half of the setback in expenditure by households and companies after the accident will likely be made in May and June, said Nomura Holdings Inc. economist Kwon Young Sun in an April 28 report.

Inflation, at an eight-month high of 1.5 percent in April, remains below the central bank’s target range of 2.5 percent to 3.5 percent, giving Lee room to support growth for now.

Park Won Shik, senior deputy governor and member of the policy board, resigned today, said Kim Tae Suk, head of the central bank’s press office. Kim declined to comment on the reason for Park’s resignation, which is effective tomorrow.

The departure opens up a second position on the BOK’s seven-member policy board. The Korea Federation of Banks last week nominated Yonsei University professor Hahm Joon Ho to fill the other position, and that is pending approval by President Park.

“Park will probably be replaced with another veteran BOK official, rather than an entire outsider, meaning there will be little change to the board’s policy-making dynamics,” said Daewoo Securities analyst Yoon Yeo Sam. “Governor Lee will apparently tighten his grip on the central bank and steer it his way for reform.”

A BOK board member said at the April 10 rate meeting that rate hikes may help curb household debt and that the BOK should prepare for “normalizing” its interest rate at an appropriate time when signs of economic recovery are clear, according to the minutes.

Stronger exports, research and development expenditure and construction investment will drive 4 percent economic growth this year, leading the BOK to raise its policy rate in December for the first time since 2011, said Nomura’s Kwon.

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