Photographer: SeongJoon Cho/Bloomberg

Bank of Korea Keeps Rate Unchanged as Political Storm Rages

  • Governor Lee sees risks to trade from next U.S. president
  • He also cites potential benefits if Trump boosts economy

South Korea’s central bank held its key rate at a record low as policy makers seek to calm markets amid uncertainty caused by the U.S. presidential election and a home-grown crisis that’s shaken President Park Geun-hye.

Governor Lee Ju-yeol and his policy board voted unanimously to keep the seven-day repurchase rate at 1.25 percent, as projected by all but one of 19 economists surveyed by Bloomberg. Lee said policy will remain accommodative, and that there is room to move if needed, while also noting the problem of rising household debt.

Lee Ju-yeol

Photographer: SeongJoon Cho/Bloomberg

Donald Trump’s victory and the questions it raises about trade and security pacts coincide with a dramatic plunge in Park’s approval rating with the arrest of a friend and aides over an influence-peddling scandal. A cloud hangs over economic policy making in government after Park said she’d replace her finance minister, only to see that brought into doubt by wrangling over a related change in prime minister.

"Coordinated policy responses are important when domestic and external environments are very difficult," Lee said in a press briefing. "The current deputy prime minister is trying to coordinate between ministries. The BOK will cooperate to stabilize the economy."

If Trump implements his election pledges on trade, they will hurt the global flow of goods and South Korea’s exports, the governor said, adding that it isn’t clear if the policies will be put into practice.

"Yet some of Trump’s policies, like lowering taxes and boosting fiscal spending to stimulate the economy may be seen to have positive impact on South Korea’s economy,” he said.

Economic Forecasts

The BOK and the government both forecast South Korea’s economy to grow close to 3 percent next year, while analysts surveyed by Bloomberg are less optimistic, with a median projection of 2.6 percent. Exports, traditionally a great strength for Korea, have been in steady decline since early 2015.

"GDP growth in Korea slowed slightly in Q3, and the near-term outlook for the economy has worsened," Krystal Tan of Capital Economics said in a note after the decision. "Samsung’s decision to scrap production of its premium Note 7 smartphone, the implementation of a tough new anti-graft law that will hit spending in restaurants, and corporate restructuring in the shipbuilding sector, all look set to weigh heavily on growth in the short-term."

The BOK expects the global economy to maintain a moderate recovery, while risks exist related to U.S. monetary policy, the direction of American economic policy, Britain’s exit from the European Union and economic conditions in emerging markets.

Export Woes

"Looking at the Korean economy, exports have continued their trend of decline while the improvements in domestic demand activities appear to have weakened a bit," the BOK said in a statement.

South Korean bond yields have risen steadily in recent months, partly as investors see record private borrowing as likely to limit room for further monetary easing. The household debt reached 1,257.3 trillion won ($1.09 trillion) as of end-June.

Still, analysts at Barclays Plc, Goldman Sachs Group Inc., and JPMorgan Chase & Co. are among those seeing one rate cut next year as ongoing corporate restructuring and domestic political gridlock weigh on economic growth. Nomura International and HSBC Holdings Plc projected two cuts to 0.75 percent in 2017.

Responding to a question on rising market yields, Lee said the central bank has measures including open-market operations, and can take steps to stabilize as needed. Lee also said Korea is not in a situation where it needs to target yields, as is the case in Japan.

The won has weakened 3.8 percent in the past month to 1,164.05 against the dollar as of 12:40 p.m. in Seoul. The yield on three-year government debt rose 12 basis points to 1.49 percent during the same period.

— With assistance by Myungshin Cho

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