Bank of Korea Holds Rate at Record Low, Weighs Fed and China

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The Bank of Korea kept its key interest rate unchanged for a third month as it gauges uncertainties for the economy from China’s slowdown and a possible policy shift by the Federal Reserve.

The decision to hold the seven-day repurchase rate at a record low 1.5 percent was forecast by 16 of 18 economists surveyed by Bloomberg. The others saw a cut to 1.25 percent.

China’s slowdown is curbing demand for Korea’s exports just as the prospect of a Fed rate increase adds to uncertainty and market volatility. Four rate cuts by the BOK since August 2014 have failed to boost growth, with the economy expanding just 0.3 percent during the second quarter and inflation staying below 1 percent so far this year.

“I think the board decided unanimously to hold as they wanted to check what the Fed does this month,” Kim Sang Hoon, fixed-income analyst at KB Investment & Securities Co. said after the decision. “The governor doesn’t seem to be thinking of another rate cut, but market expectations will remain as long as weakness in economic data persists.”

The Fed will announce its next policy decision on Sept. 17.

The economy will gradually improve in the coming months, although uncertainties such as slowing growth in China and emerging market instabilities exist, the central bank said in statements after the decision.

“The current interest rate is supportive of South Korea’s economic activities,” Governor Lee Ju Yeol told reporters after the decision. “I don’t think Korea’s economy will slow to near 2 percent.”

Sluggish Exports

“Korea’s exports remain sluggish but domestic economic indicators including consumption are showing improvement,” Lee said. “Growth so far this quarter is largely in line with the BOK’s July projections.”

The bank forecast a 2.8 percent expansion in 2015, higher than the median estimate for 2.6 percent growth among analysts surveyed by Bloomberg.

Morgan Stanley said in a report this month that China had become a drag on Korean growth, after being a major driver over the past decade. Shipments to China accounted for a quarter of Korea’s exports this year, trade ministry data show.

Korea’s overseas sales have fallen every month this year, with the latest 14.7 percent drop in August the biggest since 2009. Industrial output unexpectedly shrank from the previous month in July.

A slowdown in China’s economy would have an “extremely huge impact” on Korea, Finance Minister Choi Kyung Hwan told the Wall Street Journal this month,

Weaker Won

Korea’s export performance failed to improve despite the won weakening 5.7 percent against the dollar and 7 percent versus the yen since the end of June, prices compiled by Bloomberg show. The yield on three-year government debt fell seven basis points this month to 1.67 percent at 12:23 p.m. on Friday in Seoul, Korea Exchange prices show.

Lower borrowing costs and a housing market boom have led to a surge in household debt, which rose to a record 1,130.5 trillion won at the end of June. The government said in July it would impose stricter credit standards for people seeking loans to help curb the risks from swelling household debt.

Bank’s lending to households has risen at a level “substantially exceeding” that of recent years, and the central bank will closely monitor the trend, according to today’s statement.