Bank of Korea Keeps Rate Unchanged as Lee Weighs Weak YenEunkyung Seo, Cynthia Kim and Jiyeun Lee
South Korea’s central bank kept its key interest rate unchanged at a four-year low, as Governor Lee Ju Yeol weighs the effects of recent cuts in supporting growth that’s threatened by a weak yen.
The Bank of Korea held the seven-day repurchase rate at 2 percent, it said in a statement in Seoul today, after lowering it in August and October. Nineteen of 20 economists surveyed by Bloomberg forecast the decision, while one projected a cut.
The yen’s tumble since the Bank of Japan boosted stimulus two weeks ago increases pressure on South Korean exporters, Lee said today. The won’s relative strength and inflation below the BOK’s target range have spurred speculation that Lee may reduce the key rate further to aid Asia’s fourth-biggest economy, with sovereign bond yields falling to record lows last week.
“The BOJ has increased the BOK’s sensitivity to any sign that economic activity and external demand is weakening,” Wai Ho Leong, an economist at Barclays Plc in Singapore, said before the announcement. “The tipping point for the BOK to act will be any further deterioration of economic activity.”
South Korea’s won weakened 0.2 percent to 1,098.59 per dollar as of 12:59 p.m. in Seoul, according to prices compiled by Bloomberg. Three-year bond futures traded on the Korea Exchange fell 0.06 to 107.82. The yen has declined 5.6 percent since Oct. 30, the day before the BOJ added to already-unprecedented easing, and is down 9 percent so far this year.
“If the yen falls further, it can become a concern,” Lee said today at a press conference after the policy meeting. “I hope the yen doesn’t decline excessively.”
South Korean officials have stepped up their guard against the yen’s slide. Finance Minister Choi Kyung Hwan said on Oct. 31 that he would act if needed to stabilize financial markets. Governor Lee said on Nov. 7 the BOK is “not doing nothing” about the weak Japanese currency.
The BOK last month lowered its economic growth forecast for next year to 3.9 percent from 4 percent and its inflation outlook to 2.4 percent from 2.7 percent.
Consumer prices increased 1.2 percent from a year earlier in October, remaining below the central bank’s target band of 2.5 percent to 3.5 percent since mid-2012. The bank may consider changing its inflation target next time, Lee said today after the unanimous decision, as the optimal inflation rate may be lower than before.
“The current rate is accommodative,” Lee said, adding that if the bank was to change the policy rate, it would be desirable to alter it by 25 basis points, as any other change could add to market uncertainty.
South Korean exports rose 2.5 percent in October from a year earlier after a 6.9 percent gain in September.
Finance Minister Choi has proposed a record 376 trillion won ($343 billion) budget for next year, which needs parliament’s approval.
The BOK may cut its interest rate twice next year to 1.5 percent, HSBC Holdings Plc economist Ronald Man said in a Nov. 10 report, citing the weak yen and limited price pressures. Man lowered his forecast for 2015 growth to 3.1 percent from 3.7 percent and sees inflation at 1.7 percent, below a previous projection of 2.7 percent.
“Korea’s growth outlook has deteriorated significantly due to downside risks from a weaker yen and low confidence at home,” Man said. “It is difficult for rate cuts in Korea to neutralize the impact of the Bank of Japan’s aggressive monetary expansion.”
Nomura Holdings Inc. economist Kwon Young Sun also forecasts two more rate cuts by the BOK, one in December and another in the first quarter of next year.
“Korea is by far Asia’s most exposed country to third-market competition with Japan, which leads us to conclude that Korea is the most vulnerable economy in the region to a sharply weaker yen,” Kwon said in a Nov. 11 report. “Korean firms will delay their investments due to uncertainty over the currency market.”
Today’s policy meeting started at 10 a.m., an hour later than usual, due to a national college entrance test.