Korean Won Reverses Gain as BOK Says Growth Uncertainties High

  • Central bank holds policy rate for sixth consecutive month
  • There's a risk BOK will cut economic growth forecast: ANZ

South Korea’s won declined for a fourth day, reversing an earlier gain, after the central bank said uncertainties surrounding the nation’s economic growth are high as it left its policy rate unchanged.

The Bank of Korea kept the benchmark seven-day repurchase rate at a record-low 1.5 percent for a sixth month on Thursday, as predicted by all 17 economists surveyed by Bloomberg. While the domestic economy has sustained a recovery trend led by consumption, improvement in sentiment has been inadequate amid declining exports, the BOK said in a statement. Overseas investors sold more South Korean equities than they bought for a seventh day, taking net sales this quarter to $2.9 billion.

The won dropped 0.2 percent to close at 1,181.53 a dollar in Seoul after being up as much as 0.5 percent before the rate announcement, data compiled by Bloomberg show. It fell to 1,181.89 earlier, the weakest since Oct. 2. The currency is down 2 percent this month, the most in Asia.

"Compared with the statement last month, it seems that the BOK is less confident about economic prospects," Raymond Yeung and Louis Lam, economists at Australia & New Zealand Banking Group Ltd. in Hong Kong, wrote in a research note after the decision. There’s a risk the central bank will revise down its growth forecast for 2016, they wrote, adding they expected two cuts to the policy rate of 25 basis points each in the first half.

Contingency Plan

The BOK projects growth of 3.2 percent in 2016, compared with an estimate for 2.7 percent expansion this year. The monetary authority will update its forecast in January.

There’s a 78 percent chance the Federal Reserve will raise interest rates next week, futures contracts show. The BOK has a contingency plan to prepare for an increase and will monitor the currency market to contain risks, Governor Lee Ju Yeol said at a briefing in Seoul after the rate decision.

"Outflows from stocks pushed the won down in the afternoon," said Dong-Wook Kim, a currency trader at Kookmin Bank in Seoul. "While the won looks a bit too weak at the current level, the strength in the greenback will be sustained for a while."

The yield on three-year government bonds rose one basis point to 1.78 percent, Korea Exchange prices show. The 10-year yield was little changed at 2.22 percent.

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