Bank of Korea Holds Key Rate at Record Low Amid Uncertainty

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  • South Korean growth rate picks up, while exports remain weak
  • Risks to Korea come from changes in Fed policy, China slowdown

The Bank of Korea kept its benchmark interest rate unchanged for a fifth straight month as the economy grew at the fastest pace in more than five years while global uncertainties clouded the outlook.

The decision to hold the seven-day repurchase rate at 1.5 percent was forecast by all 18 economists surveyed by Bloomberg. Governor Lee Ju Yeol said in a press briefing Thursday that the decision was unanimous.

Analysts with Barclays Plc, Nomura Holdings Inc. and HSBC Holdings Plc were among those pushing to 2016 their forecast for a rate cut after gross domestic product expanded 1.2 percent in the third quarter, supported by rising consumption and construction investment.

Lee said the central bank will make judgments in its January revised outlook as to whether Korea’s economy can continue to recover. Exports have fallen every month in 2015 and economists are monitoring a potential shift in the U.S. Federal Reserve’s policy, which could raise capital outflow risks for emerging markets including Korea.

“The BOK’s rate-cut cycle seems to be over for now because Lee sees current rates as accommodative,” said Park Jong Youn, a Seoul-based fixed-income analyst for NH Investment & Securities Co. “Still, some may still expect a cut toward the end of next year as Korea isn’t in a full recovery cycle.”

Currency Market

While lowering interest rates further is technically possible, Lee said he disagrees with the view that Korea needs interest rates near zero, because negative effects may follow. A prolonged period of low rates has increased the number of marginal companies, Lee said.

South Korea’s three-year government bond yield rose 13 basis points this month to 1.79 percent as of 1:15 p.m. in Seoul, as traders pared expectations for additional monetary easing. The won has weakened 1.2 percent against the dollar during the same period amid the possibility of a rate increase by the U.S. central bank. It traded at 1,153.49 to the dollar in Seoul.

External Risks

In statements Thursday, the central bank said while sentiment has improved, uncertainties surrounding economic growth are high and that risks to South Korea include changes in policies at the Fed, a slowdown in the Chinese economy and capital flows. It will continue to monitor domestic demand and rising household debt levels.

Korea’s factory output expanded 2.4 percent in September from a year earlier, out pacing analysts’ estimates for a 0.4 percent gain. A recovery in private consumption is leading to improvement in production and investment, Finance Minister Choi Kyung Hwan said this week.

Meanwhile, Korea will continue to face difficult export conditions next year because of the slow global economic recovery and low oil prices, Trade Minister Yoon Sang Jick said this week. Overseas shipments fell 15.8 percent in October from a year earlier, the biggest decline since 2009, as sales of major products were hurt.