BOK Holds Rate as Won Near Six-Year High Poses Growth Risk

South Korea’s central bank left its key rate unchanged, supporting growth that faces headwinds from sluggish investment and a won near a six-year high.

The central bank held the seven-day repurchase rate at 2.5 percent for a 13th straight month, it said in a statement in Seoul today, as forecast by all 19 economists in a Bloomberg News survey.

The won has gained about 12 percent against the dollar over the past year, clouding the outlook for the nation’s exports. BOK Governor Lee Ju Yeol said last month the stronger currency and sentiment hit by a deadly ferry disaster may increase hardship for businesses, while Finance Minister Hyun Oh Seok urged companies to expand hiring and investment to boost growth.

“The BOK will likely conclude the economy may lose some steam but the interest rate is accommodative enough for now,” Lee Jung Joon, a fixed-income analyst at HMC Investment Securities in Seoul said before the decision. “Governor Lee will raise the rate in September or later in the year as inflation is creeping up.”

The won was down 0.2 percent at 1,018.10 per dollar at 10:10 a.m. in Seoul and was the best performer among 31 major currencies tracked by Bloomberg over the past 12 months. If has gained almost 18 percent versus the yen over the period.

The central bank will take measures if volatility in the currency market increases, Ryoo Sang Dai, a BOK official, told Bloomberg News on May 30.

Export Fall

Exports unexpectedly fell 0.9 percent in May from a year earlier, the biggest drop since September. The decline was partly due to fewer working days compared to last year, according to a government statement.

The economy will grow 4 percent this year and 4.2 percent next year, the fastest since 2010, the central bank forecast in April. Inflation, which rose to a 19-month high in May, will accelerate to 2.7 percent in the second half of this year, within the BOK’s target range of 2.5 percent to 3.5 percent, according to the April projections.

Most economists predict the central bank’s next rate move will be up, with the median forecast of 21 economists surveyed by Bloomberg pointing to a bump to 2.75 percent by the first quarter of next year.

HSBC Holdings Plc forecasts a 25 basis point rate increase in the third quarter of this year as inflation continues to trend up and the economy stays on track to close the output gap by year-end.

“The current won level alone will unlikely delay the Bank of Korea from its rate normalization process,” HSBC economist Ronald Man said in a June 9 report, noting the BOK delivered rate hikes even when the won was at a stronger level against both the US dollar and Japanese yen in 2005-08.

Before it's here, it's on the Bloomberg Terminal.